Eltek Ltd.: With Turnaround Completed, This Deep Value High-Tech Manufacturer is an Intriguing Growth Story

Note: Originally published on TalkMarkets.com on September 23, 2020

Summary

• ELTK, based in Israel, is a technology company focused on the manufacturing of highly complex Printed Circuit Boards (PCBs), having defense, medical, 5G Telecom, and other industrial applications.
• I detail my specific unique investment thesis supported by my analysis and insight into why I maintain my continued bullish stance, the prescience of a bright future, and the current deep undervaluation ascribed to ELTK.
• Six straight quarters of GAAP operational profitability and a 330% Year-over-Year (YoY) operational earnings growth based on comparing the first half of 2019 to the half of 2020 even during COVID-19.
• Favorable financial metrics, including a PE (10.8) TTM and a forward PE less than 8, conservative forward 2-year PEG of (0.54), Price to Sales (0.6), and industry comparison support my undervaluation analysis.
• ELTK’s corporate culture of success and excellence will enable ELTK to seize growth opportunities from macroeconomic factors, including the trade war and peace between UAE, Bahrain, and Israel.

(Disclosure: I am a 5%+ shareholder of ELTK and an Activist Investor in the Company. All statements not sourced are my opinion only. Full disclosure statement appears at the end of this article.)

Eltek Ltd. (NASDAQ: ELTK) is a global supplier and manufacturer of sophisticated and highly advanced Printed Circuit Boards (PCBs) based in Petah Tikva, Israel.

Please reference my previous Seeking Alpha article (Eltek Ltd.: A Company Poised And Ready To Take Advantage Of The Global Supply Chain Shift) for background information about ELTK, historical trading, and the company’s successful turnaround.

Since March 20, 2020, the publication date of that article, ELTK’s risen ~75% from $2.83 to $4.95 per share at the close on September 22, 2020. This article provides details on why I believe ELTK is significantly undervalued and the future potential upside. The current market mispricing creates a massive opportunity for people to invest in this microcap gem.

Investment Thesis

ELTK is a world-leading technology company in PCB manufacturing with a strong financial backing and consistent performance demonstrated by six quarters of GAAP operational profitability with both topline and margin growth YoY.

ELTK may deliver 0.64 cents GAAP operational profit (or greater) for the coming year compared with 0.48 cents for the previous year. I believe this operational profit growth is not reflected in the current share price.

From an investment perspective, I believe ELTK should be analyzed starting from Q1 2019, as that was ELTK’s 1^st quarter post-company turnaround. Any financial analysis or comparison before that is irrelevant, or at best, highly flawed. With the company turnaround and the recent global political changes, I view ELTK as a new company supported by a 50-year history. ELTK’s operational GAAP earnings growth combined with multiple macroeconomic factors and a forecast Compound Annual Growth Rate (CAGR) “of 5% to 7% from 2020 to 2025” (source: Lucintel.com) within the PCB industry will facilitate ELTK’s expansion.

I believe ELTK is significantly undervalued and the market is not aware of ELTK’s successful turnaround, the financial results of the past six quarters, and the growth story.

Infographics Depicting Framework of Value and Key Factors to Consider

InfoGraphic Source: Author’s – Michael McGauley

InfoGraphic Source: Author’s – Michael McGauley

Financial Results Supporting Company Financial Strength

On August 12, 2020, ELTK reported outstanding second-quarter financial results with 0.16 EPS GAAP operational profit. Additionally, topline growth YoY was 11% ($8.2M Q2 2019 to $8.8M Q2 2020)

CEO Eli Yaffe said: “Our revenue in the second quarter of 2020 rose to $8.8 million from $8.2 million in the second quarter of 2019. Revenues for the six months of 2020 were $17.9 million, compared to $16.9 million in the first six months of 2019. This growth is a result of 11% growth in sales to customers in Israel and reflects YoY growth in sales to defense segments in the [contract electronics manufacturers].

Our revenue from the defense sector and contract electronic manufacturers grew from $13.8 million during the first half of 2019 to $15.3 million in the first half of 2020, 11% growth YoY. The medical sectors contribute 9.7% of our revenue during the first half of 2020, representing 4% growth YoY.”

Source: Seeking Alpha ELTK Q2 2020 earnings call transcript

ELTK delivered an operating profit and a net profit for six consecutive quarters and a YoY operating profit that increased to $1,421,000 for the first six months of 2020 from $440,000 for the first six months of 2019, a ~330% increase. While a 330% growth rate is not sustainable, the fact it happened despite COVID-19 is relevant, and I believe it is a testament to ELTK’s strength.

Source: SEC Filings for Q1 2019, Q2 2019, and SEC Filings for Q1 2020, Q2 2020.

Details of ELTK’s Financial Improvements

CEO Eli Yaffe said, “…continued improvement in production efficiency that is evidenced in our improved gross margins and operating profits. Our diversified end market allowed us to grow revenue YoY despite the weakness in Indian markets.”

Additionally, SG&A expense savings helped their bottom line. Expenses went from $1,249,000 in Q2 2019 to $1,095,000 in Q2 2020. These changes were not short-term cuts at the expense of long-term growth as Eli said “…so far, we have financed our growth strategy by our positive operating cash flow and our own internal resources. During 2020 and 2021, we plan to increase our investment in new equipment and expansion of our facility and infrastructure to support our long-term sales growth. The increase in our top line 2020 reflects the continued market recognition of our high quality and reliable products, mainly in the flex PCB sectors.”

Sources: SG&A expenses SEC Q2 2019 6K filing and SEC Q2 2020 6K filing, 

Analysis

The 1-year stock price chart clearly shows an up-trend in price. However, given the GAAP operational EPS doubled from 0.08 to 0.16 cents I believe ELTK remains undervalued.

InfoGraphic Source: Chart Yahoo Finance, Comments and Annotations Author’s – Michael McGauley

Financial Metrics Supporting Undervaluation Analysis

Current and Forward PE Ratios:

ELTK is currently trading at an 10.8 PE based on Trailing Twelve Months (TTM) results. However, given the latest 2020 Q2 profit of 0.16 per share and growth potential, I believe the forward PE would be far lower. Hypothetically, if ELTK continues delivering 0.16 per-share earnings, they will earn 0.64 per share GAAP operational profit over the next year, without considering growth. Given the current stock price of $4.95 on September 22, 2020, the Forward PE is 8, assuming everything stays equal. Provided my investment thesis is correct; this forward PE would be even lower than 8 when factoring in growth and recovery from weakness in India’s revenue due to COVID-19. I do not know any other world-leading, growing, and operationally profitable tech companies ascribed a PE as low as ELTK’s.

Forward PEG Ratio:

Below is a 2-year forward PEG ratio given the following assumptions:

• Normalization of revenue from India due to COVID-19 shutdown.
• Lucintel.com Market Segment CAGR growth forecast of “of 5% to 7% from 2020 to 2025”.

ELTK continued growing even during COVID-19, and I believe ELTK is in a leading position to seize on the forecast industry growth.

• Margin expansion since the turn-around should continue, although likely at a diminishing pace as efficiency improvements naturally become more challenging to realize.
• The 0.46 TTM EPS may increase to 0.64 per share (or more) GAAP operational profit over the next year representing a 39% growth rate.
• Macroeconomic Factors Favorable to ELTK: CEO Eli Yaffe said, “We also see an opportunity to grow our business in the U.S. market due to the worsening relationship between the U.S. and China. The impact of any trade war between the U.S. and China will also impact the Israeli market since we see U.S. pressure on the Israeli Government to reduce the Israeli Chinese trade activities.”

Source: Seeking Alpha ELTK Q2 2020 earnings call transcript

In addition to the trade war, peace in the Middle East may provide an additional factor for growth. The United Arab Emirates and Bahrain recently ended the boycott of Israel, permitting economic and financial deals. This not only lessens risk within the region but also provides further opportunities. Source: CNBC August 29, 2020

2-Year Forward PEG Ratio = 10.8 (P/E ratio) / +20% (earnings growth) = 0.54

As always, one can argue for higher or lower earnings growth, which will yield a different, forward PEG. However, I believe the 20% ascribed to be conservative, given the factors above.

Price-To-Sales Ratio:

Using the Market Cap of $21.6M as of September 22, 2020, and a TTM Revenue of $35.8M, the current price-to-sales ratio is a mere 0.6 indicating ELTK is severely undervalued. A 0.6 Price-to-Sales ratio is low for a growth-oriented company in an industry that is undergoing expansion and has favorable macroeconomic factors moving into the future.

Shareholder’s Equity and Book Value:

Eltek’s shareholder equity continued growing since Q1 2019.

Period	Q1 2019	Q2 2019	Q3 2019	Q4 2019	Q1 2020	Q2 2020
Shareholder Equity $Millions	1,159	5,296	5,824	6,269	6,666	7,556
Growth vs Previous Qtr.		4137	528	445	397	890
Percent Growth vs Previous Qtr.		457	10	7.6	6.3	13.4

Source Data: SEC 6K Quarterly Filings – Delta Analysis Author’s Michael McGauley

The Book Value Per Share (BVPS) is now over $1.72 per share, which is the highest since 2016 when ELTK incurred losses.

Comparison of ELTK to Companies in the Same Industry

Focusing on companies in the same industry space as ELTK, we see again ELTK is highly undervalued.

Company	Symbol	Market Cap	PE (TTM)	EPS (TTM)	Stock Price / Share $
Sanmina Corp.	SANM	1.8B	17.7	1.50	26.37
Benchmark Electronics	BHE	718M	1,536	0.01	19..49
Celestica	CLS	958M	N/A	-0.03	7.34
Plexus Corp	PLXS	2.07B	18.2	3.90	70.46
Flex Ltd	FLEX	5.4B	60	0.18	10.75
Jabil Inc	JBL	5.0B	131	0.25	33.26
SMTC Corp	SMTX	106M	N/A	-0.10	3.66
Eltek Ltd.	ELTK	21M	10.8	0.46	4.95

Source of Company Comparison: Selected companies from a list of publicly traded Printed Circuit Board Companies provided by Fintel.io

Data Source: Yahoo Finance (on September 22, 2020) 

On ELTK’s Corporate Culture of Success and Excellent Management Team

During my due diligence, I visited ELTK’s factory and Nistec’s facilities. Given that Mr. Nissan owns a controlling position in ELTK through Nistec Ltd, I wanted to hear his story. I learned that Mr. Yitzhak Nissan is very personable.

Shareholder Friendly Ownership

ELTK has a history of being shareholder-friendly. One example of this is liquidity and capital resources. Nistec, the majority shareholder of ELTK, owns ELTK debt and provides loans at a Prime + 1.75% rate.

Source: SEC 6K filed August 13, 2020 exhibits 1 and 2

Risks

Even though investing in a microcap stock is considered highly risky, this is a particular case microcap. With a 50-year business history, six consecutive quarters of GAAP profitability and revenue growth, favorable macroeconomic conditions, world-leading technology, control, and ownership by Nistec, ELTK is at a real competitive advantage.

Conclusion

ELTK is significantly undervalued based on fundamentals and macro-economic factors. ELTK proved it is in the right space, with the right people, right tech, at the right time, and I believe this success will continue.

Disclosure

I am long ELTK, and I own 5%+ of the Company as filed in schedule 13D with the SEC. Information presented in this article is my own opinion and is for informational purposes only; it does not intend to make an offer or solicitation for the sale or purchase of any securities, and should not be considered investment advice. Be sure to first consult with a qualified financial adviser and tax professional before implementing any strategy discussed here. The information provided reflects my views as of specific periods; such opinions are subject to change at any point without notice. I will not trade in ELTK during the next 72 hours.