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Breaking the Circle: The Potential of PCB Technologies



16th March ,2021

If there is one business that has not only “hovered” over the corona crisis, but even enjoys the shake-up and forced change of habits, it is the technology sector. The fact that global and strict gathering and movement constraints have been placed, has led to a dramatic shortening of the development time for the use of technology that enables remote digital communication.

It is not that this technology did not exist before, but the Corona has given it a huge boost. In my opinion, this is more a social change than a technological improvement, and as such - which came much earlier than planned - it will not disappear with time. Therefore, it is not surprising that technology companies, especially those that are focused on digital communications and work using a cloud model, flourished during one of the most difficult periods.

That said, the intensity of the trend was not the same, as technology stocks that are perceived as less glamorous and are production heavy and labor-intensive, did indeed report a positive return - but significantly lower. If you look, for example, at the return recorded by the shares of companies in the field of electronic components (Electronic components) in the past year, you find that it amounted to an average of 10% - compared to the return of almost 50% recorded by the Nasdaq index at that time.

"If there is one business that has not only “hovered” over the corona crisis, but even enjoys the shake-up and forced change of habits, it is the technology sector."

Israeli Technology is a Market Leader

The point is that blind generalizations produce biases and distortions, since there are attractive technology companies even in the less glittering fields, and unlike "fashionable" companies, they are traded at interesting prices. Names? PCB Technologies, a manufacturer of printed circuit boards.

The transformation of the East Asian countries into the world's manufacturing house - a process that began with the textile industry, moved to metals, went on to consumer products and electronics, and also reached the field of printed circuit board manufacturing. PCBs are now available in the East in large series and at very competitive prices, but these do not entice customers looking for added value and complex products.

As a result, and in the face of mass production in Eastern countries, complex production capabilities have developed in Israel, which also require a high level of reliability. Some argue that the professionalism of the local industry was born out of the security needs, as the defense and military industries demand reliable and sophisticated products.

Whatever the reason, the very fact that an industry with prominent and exceptional expertise has developed in Israel has given rise to another market that needs its printed circuits from local companies - the medical industry. Since medicine deals with human life, it is understandable that maintaining the reliability and quality of the equipment is imperative.

In this context, it is worth adding an important point: the printed circuit is the heart of the electronic product - its quality ensures the reliability of the device, while its price is a small contributor to the total product cost.

"PCBs are now available in the East in large series and at very competitive prices…"

Electronic Components Companies: A Clear Link between Research and Development Expenses and Profitability

According to the financial results of the last 12 months, as appeared in the reports of 116 companies in the field of electronic components traded on the US stock exchange.
Source: Bloomberg

PCB - thanks to the investment in development

What caught my attention at PCB Technologies is an accounting item in the financial statement. Until last year, the company's profit and loss statement did not contain a series of "research and development expenses", but in early 2020 that changed: PCB began reporting these expenses separately for the first time.

This is not a technical matter or form of presentation, as it indicates the management’s intentions; increasing investment in the development of new products, as well as in innovative production processes. In the case of PCB, this is doubly important, as the company's operating profitability is relatively low today, so the new products it develops will not only affect the growth rate – the end effect will be increased profitability.

The company's latest announcement that it has developed production capability of ultra-miniature printed circuits, with conductor width and conductor spacing of only 25 microns, is just one example of the trend. The positive relationship between research and development and profitability is not "shocking knowledge", so naturally, it also exists in the field of electronic components - a market in which PCB is active.

PCB's market capitalization is $115 million, with net cash in its balance sheet approaching $30 million. Besides the fact that it shrinks the net profit multiplier, the high liquidity also has a practical aspect; buying a company in the near future is a more than just a feasible option.

Bottom line:

PCB Technologies is controlled by the FIMI Investment Fund, and the fund's declared purposes are clear: acquisition at a comfortable price, orderly strategic thinking, changes and adjustments in management, identification and definition of growth engines - often through acquisitions outside Israel, strict implementation of the outlined business plan, and above all, longevity.
In this respect, PCB is no different from FIMI's other investments. Judging by the changes made in the company, along with the improvement in the results of the past year, this is just the beginning.

Published in Globes, the leading financial magazine in Israel >

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