By Thomas Kerr, CFA
READ THE FULL ELTK RESEARCH REPORT
On December 18, 2023, Eltek Ltd. (NASDAQ:ELTK) announced the placement of purchase orders totaling $4.5 million for state-of-the-art machines, software, and a comprehensive service contract. Most deliveries are scheduled for the 1st quarter of 2024 in connection with the planned expansion of its production capabilities. These purchase orders are in addition to the three production lines ordered in August 2023. The first production line is on its way to Eltek and is scheduled be installed during the beginning of the 1st quarter of 2024.
CEO Eli Yaffe stated, “The capital investments outlined in these purchase orders align with Eltek’s strategic vision and commitment to enhancing operational efficiency, expanding technological capabilities, and aligning with future product portfolios. The purchase orders also underscore the Company’s dedication to upgrading its engineering capabilities to maintain a competitive edge in the dynamic PCB market. These strategic investments are integral to our broader Company vision. By focusing on operational efficiency and staying at the forefront of technological advancements, we aim to not only meet but exceed the evolving needs of our customers.”
Valuation and Estimates
We are raising our 2024 revenue and EPS estimates slightly to account for stronger than expected revenue generation from the increase in production capacity. In addition, we believe defense companies in Israel and around the world may be increasing PCB purchases due to the ongoing military conflicts in the Middle East.
Our 2024 annual revenue estimate is now $53.3 million and our EPS estimate is now $1.29. We are increasing our price target to $18.00. That price target, if achieved, would put the stock selling at roughly 14.0x our 2024 EPS estimate of $1.29.
The global market for flex-rigid PCBs is expected to grow at a CAGR of approximately 10% and reach $7.5 billion by 2025. We expect the company’s revenues to grow at solid double-digit rates for at least the next 5 years. We expect gross margins to steadily increase to 28% over the next 2-3 years. EBITDA margins could increase from 16.0% in 2023 to 20.0% in coming years depending on gross margins and levels of SG&A spending going forward.
Our primary valuation tool utilizes a Discounted Cash Flow process. Under the scenario described above, our DCF based valuation target is approximately $18.00 per share. Our target price may be conservative as it does not account for any M&A transactions that would materially increase the company’s manufacturing capacity.
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