Eltek set to start fulfilling potential

Shlomi Cohen

The change of ownership looks like solving the circuit board maker's main constraint - lack of production capacity. Different ownership has done On Track Innovations a power of good as well.

The drums of war now beating bring to mind a small company that I hold in my portfolio here. Although it isn't perceived as a defense company, I know that it is flooded with orders at present, as the supplier of the printed circuits for the "Iron Dome" rocket interception system, and for several other defense platforms, production of which has been speeded up lately.

The company in question is Eltek Ltd. (Nasdaq: ELTK), which specializes in what are known as flex-rigid circuit boards, widely used in airborne systems that need to withstand extreme conditions of temperature and pressure. Two weeks ago, Eltek announced a change in the control of the company, and last week it reported record results for the second quarter, with sales of $12.4 million.

CEO Arieh Reichart explained in the results announcement that only a shortage of production capacity prevented sales from being higher as a result of high local demand, and I'm sure that he referred mainly to the defense market. Even without the current tension, it is known that, since Operation Pillar of Cloud, the army has been expediting procurement of equipment for home front defense, and Eltek is among the beneficiaries of this momentum. I see no slowdown in this sector in the next year or two.

Eltek's annual sales are running at $50 million, and its profit at $1.4 million, but it is traded at a very low value of $8.5 million. After ownership passes from Yossi Maimain, who had a 24% stake, to Yitzhak Nissan's Nistec, which will hold a 50% stake, the company's value, on the basis of the current share price, will rise to $13 million, but at the same time it will gain $4.2 million cash.

With the change of ownership, for the first time in a long time, Eltek will have sufficient resources to expand its production capacity, and to become much more efficient, which, in my opinion, will multiply its profit several times over within a couple of years, and the share price should respond accordingly.

Further long-term potential could develop if the Nistec group, which is currently privately held and has other activities to the tune of $30-40 million annually, should decide to merge itself into public company Eltek.

On Track back on track

Another small company I hold here, OTI - On Track Innovations Ltd. (Nasdaq: OTIV; DAX: OT5), underwent a change of ownership in 2012. Its new strategy is now becoming clear, and there are initial signs of recovery and of great potential. In a classic hostile takeover move through purchases on the open market, US investors wrested control from On Track's founders, headed by Oded Bashan, who had run the company all along.

Last week, On Track's share price rose 23%, after three positive announcements. The New York court rejected the petition by mobile giant T-Mobile (TMUS) to overturn a previous ruling that On Track's patent infringement suit against it should not be dismissed. This means that a hearing will shortly take place, or the sides will reach a settlement that could bring On Track tens of millions of dollars. The patent in question relates to technology for payment by smartphone, NFC (near field communication), a very hot field these days.

According to the second positive report, several directors have recently set up blind stock purchasing programs, and have so far bought around 735,000 shares. As someone who follows all the Israeli companies traded on Nasdaq, I do not recall directors ever choosing to send a positive message to the stock market by buying shares, apart from Attunity Inc. (Bulletin Board: ATTUF) chairman and CEO Shimon Alon, who set up a similar plan this year.

The third announcement was the report of the second quarter results, in which could be seen substantial improvement in all measures, for the first time since the company changed hands and Ofer Tziperman was appointed CEO, replacing Oded Bashan. Sales grew by an annualized 19%, gross profit grew 57%, and expenses fell, leading to a sharply narrower loss.

The strategic change lies in the decision to focus on non-contact payments, and particularly on the leading niche, leveraging the company's many patents beyond the one that is the subject of the lawsuit, which, as mentioned, has successfully passed a critical stage.

In two months' time, On Track will sell its SmartID division to SuperCom (SPCBD) for $10 million, doubling its cash balance, with a further $12.5 million to come if the division achieves certain milestones.

It's worth starting to monitor the buyer, SuperCom, as well. Since entrepreneur Arie Trabelsi, who is now CEO, took it over three years ago, the company has shot up to a current market cap of $40 million, and it hopes to return to being listed on Nasdaq, after carrying out a reverse stock split last week. To finance the deal with On Track and other acquisitions, it is making a $25 million offering.

Published by Globes [online], Israel business news - www.globes-online.com - on September 2, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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