Avrot: The Core Business Is Breathing Again, but Plastics and Investees Still Hold Earnings Down

Company Overview

At first glance, Avrot looks like a small pipes and infrastructure company with three operating engines. That is technically true, but it misses the real economic picture. In 2025 the engine carrying the group is once again the steel segment, the projects segment swung back to profit, but the growth engine management has been talking about for years, Paldex plastics, weakened sharply. On top of that sits another layer, the investees, which wipes out too much of the operating improvement before it reaches common shareholders.

That is the core point. A quick read of the operating line shows profit from ordinary activities rising from ILS 7.3 million to ILS 11.4 million and might suggest the turnaround is already complete. That is only a partial read. Net profit fell to just ILS 1.2 million, mainly because equity-accounted losses jumped to ILS 5.1 million, while the segment that gave the group a visible lift in 2025, water infrastructure projects, looks less clean once you read the impairment work attached to the annual report.

What is working now? Steel is generating real operating leverage again. What else is working? Operating cash flow jumped to ILS 17.6 million. Why does that matter now? Because after several years of declining revenue, Avrot is showing that the industrial core can still produce cash. What is still unresolved? Weak plastics, a projects business that leaned on one unusual project, and an investee layer that keeps consuming the improvement. What has to happen over the next 2 to 4 quarters? Steel needs to convert backlog into revenue without reopening working-capital pressure, plastics need to prove they are more than a paper option, and projects need to show profitability without relying on that one outlier job.

There is also a practical screen that needs to be stated early. Based on the latest trading snapshot, the stock traded just ILS 2,499 on the last trading day. Even if the business thesis improves, liquidity is almost nonexistent. That is not a cosmetic detail. It is a real actionability constraint.

Structurally, Shapir controls Avrot with 54.85% of the shares. The company operates through three reported segments: steel pipe coating and wrapping, production and marketing of Paldex plastic pipes, and water and sewage infrastructure contracting. On top of that it holds stakes in entities such as Paladeri in Italy, Palad France, Paldex Technologies, and BOT Environmental Quality. At year-end 2025 the group employed 108 workers and service providers, including 49 in steel, 27 in plastics, 5 in projects, and 27 in HQ and corporate functions. On ILS 128.5 million of revenue, that works out to roughly ILS 1.19 million of revenue per worker and service provider. For a small industrial company that is decent, but not high enough to absorb many execution mistakes.

The group’s economic map looks like this:

The chart makes clear what the consolidated headline hides. Revenue fell, but not because every engine weakened together. Steel recovered, projects were broadly stable, and almost the entire gap came from plastics. That is why the right question on Avrot is not whether 2025 was good or bad. It is which part of the improvement is actually repeatable.

Events and Triggers

Steel Has Become the Anchor Again

The cleanest positive trigger in 2025 came from steel. Segment revenue rose to ILS 78.1 million from ILS 73.1 million in 2024, while operating profit before other items almost doubled to ILS 9.6 million from ILS 4.9 million. This does not look like a year driven only by more volume. Cost of sales in the segment was almost flat while revenue increased, which means gross profit and operating margin expanded sharply.

Backlog supports that read. Steel backlog stood at ILS 28.0 million at year-end 2025, versus roughly ILS 20 million at year-end 2024, and had already reached ILS 36.0 million near the report date. That is not a guarantee, because the company itself notes that backlog can be delayed or changed, but it does mean the strongest segment entered 2026 with more work than it had a year earlier.

Projects Returned to Profit, but on a Narrow Base

The second trigger looks good on first read, but needs caution. Water and sewage infrastructure moved from an operating loss of ILS 0.9 million to an operating profit of ILS 3.2 million with almost no top-line growth. That is a sharp improvement in execution. The problem is that the company itself discloses that 56% of segment revenue, about ILS 12 million, came from one project. The impairment report reinforces the point: 2025 was helped by a specific project that also carried a materially higher margin than the rest of the segment.

In other words, 2025 gave this segment a margin shot, but it has not yet proven that this is the new base level. Any market read that takes the 2025 projects margin as the default for 2026 is moving too fast.

Plastics Are Still the Unfinished Story

The main negative trigger is plastics. Segment revenue fell to ILS 28.3 million from ILS 41.7 million in 2024, and the segment moved into an operating loss of ILS 1.1 million. Export revenue weakened materially, and at group level foreign revenue fell from ILS 12.2 million to ILS 5.9 million. The company explicitly links part of that weakness to exchange-rate changes, which matters especially for plastics because the main foreign markets are in Europe and several niche overseas geographies.

This matters because Paldex is exactly where Avrot wants investors to see future growth: a substitute for concrete, a greener product, Italian expansion, domestic penetration, and adjacent storage products. On paper, all of that still exists. In the numbers, 2025 moved backward.

Investees Bring the Story Back to Earth

The fourth trigger is less visible in the headline, but central to the thesis. Avrot reported ILS 5.1 million of equity-accounted losses in 2025, versus just ILS 39 thousand in 2024. At the same time, the carrying value of investments in associates and joint ventures fell from ILS 9.25 million to ILS 4.31 million. That is not noise. It means the layer outside the core business lost real value.

The main source of the damage was BOT Environmental Quality, where Avrot’s share of the loss reached ILS 5.2 million. The company says that most construction work at the Haruvit landfill-gas power project is already near completion, but the facility is still only in early stages of evaluating electricity-generation capability, and the company is reviewing alternatives for the project’s future. That language says the value has not stabilized yet. It is still trying to find an economic shape.

Backlog shows why 2026 does not begin from zero. Steel enters with momentum, plastics with some improvement, while projects actually show lower near-report backlog than year-end backlog. That is another sign that projects should not simply be extrapolated from the 2025 headline.

Efficiency, Profitability, and Competition

What Actually Drove the Steel Improvement

In steel, Avrot delivered exactly what a small industrial company needs to show: more revenue with almost no increase in cost. Revenue rose by ILS 5.0 million, gross profit increased by ILS 5.3 million, and operating profit before other items rose by ILS 4.6 million. That does not read like a one-off inventory benefit or lucky timing. It looks like a year when pricing, mix, and execution finally worked together.

The customer mix in steel helps explain part of the move. Pipe distributors rose to 63% of segment revenue from 54% in 2024, while government companies fell to 13% from 24%. In parallel, sales to Mekorot dropped to ILS 5.2 million from ILS 15.3 million a year earlier. So Avrot moved from a year that depended more heavily on one major institutional buyer toward a year carried more by distributors and other customers. That is not automatically good or bad, but it does mean 2025 steel was less dependent on Mekorot and more diversified by sales channel.

The yellow flag in steel is not margin. It is concentration. Even after the drop in Mekorot exposure, the top three steel customers still represented ILS 39.0 million, half of segment revenue and 30% of consolidated revenue. That is already a concentration level investors need to keep in mind.

Plastics Are Weak Not Only in Volume, but in Thesis Quality

In plastics, Avrot still has a compelling narrative: a unique product in Israel, installation advantages versus concrete, local-market potential, Europe, Italy, and storage products. But the 2025 numbers say something simpler for now: this is a growth engine that is not behaving like one.

Revenue fell 32%, gross profit dropped from ILS 12.6 million to ILS 6.9 million, and gross margin fell from 30.3% to 24.4%. There is also no scarcity story here. Paldex’s production line in Israel ran at only about 50% utilization, while in Italy the land and new machine were acquired but site adaptation for operations had not yet begun. There is expansion investment, but still no concrete proof that it is turning into commercial strength.

One more important point is that management cannot blame the weak year on one customer. The company explicitly says there is no dependence on a specific customer in plastics. That makes the 2025 weakness broader: market demand, FX pressure, execution, and slow commercialization. It is less comfortable, but more real.

Projects Improved, but Do Not Confuse a Good Year with a New Economic Base

The margin swing in projects highlights the most interesting problem in the report. Avrot can show a sharp improvement in this segment, while its own valuation work for the same segment assumes a lower normalized margin base going forward. In the impairment work, management and the valuer assume gross margin of 13% for 2026, 14% for 2027, and only from 2028 onward 15%. So even the document used to estimate value in use does not treat 2025 as the normal starting point.

That sharpens the quality-of-earnings question. One large project can lift a full year, but it does not create a moat. For the market to believe that projects have become a real value engine rather than a source of volatility, Avrot will need to prove at least two things: an ability to win additional work without relying on a single special case, and an ability to keep margins at reasonable levels as project mix changes.

This chart explains the 2025 complexity better than a top-line summary. The improvement was not broad-based. Steel became very strong, projects jumped, and plastics deteriorated sharply. Add the investee losses, and you get a company whose operating profit is much better than the earnings that actually reach shareholders.

The message is clear. Avrot did not lose the domestic market. It mainly lost the foreign one. Anyone who still wants to view Paldex as a meaningful export growth engine now has to demand renewed proof, not just accept the strategic narrative.

Cash Flow, Debt, and Capital Structure

Cash Flow Improved, but Needs the Right Framing

Operating cash flow rose to ILS 17.6 million from ILS 3.7 million in 2024. That is a major jump, and working capital is the main reason. Receivables declined by ILS 3.8 million, versus a use of ILS 2.3 million in 2024, and receivables more than one year overdue fell from ILS 14.6 million to ILS 9.4 million. The expected-credit-loss allowance was also cut from ILS 10.3 million to ILS 5.4 million.

That is a real quality improvement, but it is not a clean one-way picture. Inventory rose by ILS 3.3 million, and trade payables fell by ILS 2.8 million. So Avrot did not solve every working-capital issue. It simply collected much better than in the prior year while other parts of working capital still consumed cash.

The All-In Cash Flexibility Read

When the thesis is about financing flexibility, it is better not to stop at operating cash flow. On an all-in cash flexibility basis, meaning how much cash was actually left after real cash uses, 2025 looks like this: ILS 17.6 million came in from operations, ILS 2.0 million went to CAPEX, roughly ILS 0.2 million went to investments and loans to investees, ILS 6.2 million went to lease principal, ILS 1.9 million was paid in interest, and ILS 9.0 million was used to reduce short-term bank debt. That is why cash fell from ILS 9.3 million to ILS 7.7 million despite the strong operating inflow.

That matters. Avrot did not spend the year’s cash generation on weak day-to-day operations. It used it to clean up leverage. That is a good use of cash, but it also explains why the cash balance did not look stronger at year-end.

Bank Debt Is Not the Pressure Point, but Leases Matter More Than They Seem

At year-end 2025, bank loans were down to only ILS 4.0 million, all short term. Financial covenants are nowhere near stress: tangible equity of roughly ILS 104 million versus a minimum of ILS 55 million, a tangible-equity-to-balance-sheet ratio of 49% versus a 22% minimum, and annual EBITDA of about ILS 20.8 million versus a floor of ILS 10 million. The working-capital-to-short-term-credit ratio stood at about 19, far above the 1.25 minimum.

So Avrot’s active bottleneck is not covenant pressure. It is operational and strategic execution. Still, there is one fixed burden investors should not ignore: lease obligations. Lease liabilities stood at ILS 72.2 million, and total lease-related cash paid in 2025 was ILS 7.3 million. In plain terms, anyone looking only at bank debt is missing the fact that the company’s fixed cost base still includes a meaningful annual lease burden relative to its scale.

The chart shows the point visually. 2025 is a year of lower cash, but an even steeper reduction in short-term bank debt. That is why balance-sheet quality improved even though the cash box got smaller.

Outlook

Finding one: the operating improvement in 2025 is real, but not symmetrical across segments.

Finding two: net profit still does not reflect the stronger core business because the investee layer keeps dragging it down.

Finding three: in projects, even the company’s own valuation documents assume a lower margin base than 2025 delivered.

Finding four: plastics still carry strategic optionality, but not enough commercialization proof.

For now, 2026 looks like a proof year. Not a reset year, because the core business is clearly stronger than it was in 2024. But not a breakout year either, because too many pieces of the thesis still rely on assumptions rather than proof. This is especially visible in the fourth quarter of 2025: Avrot delivered ILS 5.1 million of profit from ordinary activities and a 26.2% gross margin, yet still posted a net loss of ILS 1.46 million. The reason was a ILS 4.59 million loss from investees in the quarter. That is a sharp reminder that the core business alone is still not enough.

That leads to four key checkpoints:

1. Steel Must Convert Backlog into Profit, Not Just Volume

The base for 2026 exists. Steel backlog is higher, and the segment is still running at only about 50% utilization, so there is no visible manufacturing bottleneck that requires fresh capacity spending. What needs to be monitored? That growth is not being bought through weaker receivables discipline, and that 2025 margins were not just a one-year pricing window. If the main customers hold volume and working capital does not reopen, steel can remain the main value engine.

2. Plastics Need to Prove They Are a Business, Not a Story

Management continues to frame Paldex as a central growth engine. But at year-end 2025, the basic test is still unmet: falling revenue, weak exports, 50% utilization, and the Italian site still not adapted for operations. Even if plastics backlog improved from ILS 14.6 million at year-end to ILS 17.0 million near the report date, that still does not answer the real question. Can this segment return to structurally healthy margins, or is it still just future potential?

3. Projects Need a Second Year That Does Not Depend on a Rescue Job

The impairment work gives a very clear framework. The 2026 revenue assumption in the model is ILS 20.3 million, based on signed backlog of about ILS 11.3 million plus tenders the company has entered at win probabilities of 50% to 65%. The model also relies on possible Shapir synergies, a higher contractor classification, and water-infrastructure work around light-rail projects. None of that is impossible, but it is still a forecast that needs several things to go right. In terms of certainty, projects have not yet moved from “improvement” to “new base.”

4. Investees Need to Stop Acting Like a Black Hole

In the holdings layer there are mostly questions, not answers. BOT Environmental Quality is still reviewing alternatives at the Haruvit facility, Palad France lost ILS 380 thousand, and Paladeri contributed only ILS 87 thousand of profit even as the company and its partner have already invested in the new machine and land in Italy. As long as this layer does not stabilize, it is hard to turn better operating performance into a clean net-earnings story.

In terms of near-term market interpretation, this is likely to be the focus: was 2025 the beginning of a broader recovery, or just a year when steel carried the business while the rest of the structure remained unstable?

Risks

The first risk is margin normalization in water projects. The company has already signaled that 2025 was helped by an unusual project, and the impairment model assumes a lower normalized margin. If that project effect does not repeat, segment profitability can fall quickly.

The second risk is continued plastics weakness. Export softness, FX exposure, competition against concrete and other substitutes, and just 50% utilization create a situation where the future growth engine may keep asking for more time. Until the Italian investment translates into volume and earnings, the value there remains mostly optional.

The third risk is the investee layer itself. This is no longer a footnote. The carrying value of investees fell 53% in one year, while Avrot’s share of losses jumped to ILS 5.1 million. That creates a gap between operating value created in the core and value actually accessible to shareholders.

The fourth risk is legal and execution overhang. The company is involved in several project-related legal proceedings, including a roughly ILS 4.4 million claim with a ILS 5.3 million counterclaim, a subcontractor claim for ILS 1.8 million, and another claim of ILS 734 thousand related to allegedly defective pipes. In some cases provisions were recorded. In others the company says the outcome cannot yet be estimated. None of this looks existential, but it adds another layer of noise.

The fifth risk is liquidity in the stock. Daily turnover in the low thousands of shekels means that even if the business improves, the gap between theoretical value and tradable value may remain wide.

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Conclusion

Avrot ended 2025 in better shape than it entered the year, but not in a clean one. Steel is generating real profit again, projects showed a sharp rebound, and the bank balance sheet looks comfortable. On the other side, plastics remain far from the strategic story management wants to tell, and investees are still taking too much of the core improvement away. In the near term, that is what will drive market interpretation: whether 2026 brings broader proof, or just an extension of the imbalance between engines.

Current thesis: Avrot’s core operations improved in 2025, but the route from better operations to durable shareholder earnings still runs through fixing plastics and stopping the losses in investees.

What changed: A year ago the story was mainly about declining revenue and weak operating balance. Now steel is clearly back as an engine, projects improved sharply, and the balance sheet is cleaner. That is real progress.

Counter-thesis: The market may still be too harsh. Steel is stronger, bank leverage is low, and investee losses could shrink quickly if the deterioration stops even without a major plastics rebound.

What could change market interpretation in the short to medium term: continued steel backlog conversion, a return to growth in plastics, and a sharp drop in equity-accounted losses. On the other hand, another quarter or two in which operations look decent but the bottom line is still crushed would quickly bring skepticism back.

Why this matters: Avrot is now at a point where you can see real improvement in the economics of the core business, but you still cannot say that operating value has already turned into clean, accessible value for common shareholders.

What must happen over the next 2 to 4 quarters for the thesis to strengthen: steel needs to keep margins while converting backlog, projects need to show profitability without one unusual job, plastics need to stop shrinking and recover, and investees need to stop erasing the operating improvement.

What would weaken the thesis: renewed working-capital pressure, another leg down in Paldex, more delay in Italy or Haruvit, or a quick fade in project profitability once the unusual project leaves the base.