Avrot Follow-Up: How Repeatable Is the Water Projects Margin?
The main article identified the water-projects activity as one of the drivers behind the core rebound. This follow-up shows that the jump to a 14.3% operating margin in 2025 rested on one project that produced 56% of segment revenue, while the impairment model already resets gross margin to 13% in 2026 and builds part of next year on probabilistic tender wins.
The main article argued that the water-projects activity helped Avrot’s core operations breathe again, but did not yet prove that a durable profit engine had been rebuilt. This follow-up isolates only that question: does the segment’s 2025 profitability reflect a new level, or was it mainly one unusual year helped by one exceptional project, friendlier collection terms, and a forward model that still leans on work that has not been awarded yet?
That question matters because at first glance the segment looks as if it already passed the proof test. Revenue barely moved, yet the operating loss flipped into a ILS 3.2 million operating profit and the operating margin jumped to 14.3%. That is a strong headline number. The problem is that the most useful document for testing how repeatable that number is also qualifies it. The impairment work attached to the annual report explicitly says 2025 was a one-off year in profitability, pulls gross margin back to 13% already in 2026, and places part of next year’s revenue on tenders that are still unresolved.
So there is no need to choose between two conflicting stories. The two documents are really saying the same thing together: the rebound was real, but the comparison base is still too narrow to call it a normalized earnings level.
The 2025 Margin Is First And Foremost A Concentration Story
In the annual report, the water and sewage infrastructure contracting activity shows a clear move from loss to profit. Revenue was ILS 22.0 million in 2025, versus ILS 22.8 million in 2024 and ILS 23.0 million in 2023. In other words, this is not a growth story. Almost all of the change came from profitability. The segment moved from an operating loss of ILS 0.9 million in 2024 and ILS 2.0 million in 2023 to an operating profit of ILS 3.2 million in 2025.
That is a sharp improvement, but it is not spread across many projects. The company says that in 2025 about 56% of the water-activity revenue, ILS 12 million, came from a single project. In a segment that generated ILS 22.0 million of revenue, that is extreme concentration. The implication is obvious: it does not take much to move the margin up or down. One project with better pricing, smoother execution or friendlier payment terms can make the whole year look different.
This chart sharpens the point. If revenue stayed in the ILS 22 million to ILS 23 million range for three years, while margin moved from negative 8.7% to positive 14.3%, the change almost certainly came from project quality, not from a large expansion in volume.
That is also visible in backlog. Water-project backlog stood at ILS 12.42 million at the end of 2025 and ILS 10.42 million near the date of the report. Those are not trivial numbers relative to annual revenue, but they are also not a wide cushion after a year in which one project alone delivered ILS 12 million of revenue. Put differently, even if 2025 marks a recovery, it still does not prove that the segment has already moved to a healthier revenue mix.
That pie chart captures most of the story. When more than half of a segment comes from one project, that year’s profit says a lot about that project and much less about the normalized profitability of the whole activity.
The Impairment Work Already Pulls The Margin Back Down
The more important point is that the supporting document attached to the report does not try to roll 2025 forward in a straight line. Quite the opposite. The impairment work describes 2025 as a recovery year, but it also says the unusual improvement in profitability came from a specific project that represented about 50% of that year’s revenue and carried materially higher profitability than the rest of the activity. That is why the forward model is much more restrained.
In that model, water-project revenue is expected to fall to ILS 20.32 million in 2026 from ILS 22.03 million in 2025. Gross margin, which stood at 23.5% in 2025, is cut to 13% in 2026, rises to 14% in 2027, and only from 2028 onward settles at 15%. Operating margin in the model also comes back to earth: 9.5% in 2025 on the impairment-work basis, versus only 1.9% in 2026, 3.6% in 2027 and 4.9% in 2028.
That is a material point. Even if one uses the stricter impairment build rather than the segment operating-profit presentation in the annual report, 2025 still looks like an unusually strong year, not like a new normalized base.
That chart says something very clear: the same document that is meant to support the value of the activity does not allow the 2025 margin to survive even one year forward. It strips most of the outlier economics out immediately.
The structure of the 2026 revenue forecast is even more important. The model builds ILS 20.3 million of revenue from only two sources: signed backlog of ILS 11.3 million, and four tenders the company has already entered and is waiting to hear back on. Those tenders could together generate ILS 16 million of revenue, but the model only takes ILS 9 million from them after applying 50% probability in most cases and 65% on one project described as being at a more advanced stage.
That is exactly the difference between profitability that looks good in the report and profitability that can genuinely be called repeatable. If almost half of the 2026 forecast still depends on tenders that have not been won yet, it is very hard to treat 2025 as proof that the segment has already reached a new profit level.
2025 Working Capital Also Looks Unusual, Not Just The Margin
The less visible, but equally important, point is that the exceptional project improved not only the margin but also the quality of cash conversion. In the impairment work, operating working capital as a percentage of revenue falls from 17.3% in 2023 to 11.0% in 2024 and just 6.3% in 2025. The explanation there is direct: the unusually low 2025 ratio came from that same specific project, whose payment and collection terms were favorable because of the type of project involved.
This matters because it means the outlier year helped the activity in two layers at once. It delivered both higher profitability and friendlier working-capital conditions. So when the model normalizes the business, it does not stop at cutting gross margin back to 13%. It also lifts operating working capital back to 8.7%, the average of 2024 and 2025.
| Item | 2025 | 2026 in the model | Why it matters |
|---|---|---|---|
| Revenue | ILS 22.03 million | ILS 20.32 million | The model does not assume automatic growth after the strong year |
| Gross margin | 23.5% | 13.0% | Most of the 2025 outlier economics are removed immediately |
| Operating margin in model | 9.5% | 1.9% | Even after efficiency assumptions, forecast profitability remains modest |
| Operating working capital as % of revenue | 6.3% | 8.7% | 2025 working-capital terms are not treated as representative |
| Cash flow in the model | Not comparable on the same basis | Negative ILS 83 thousand | Even an accounting-profit year does not automatically produce cash surplus |
This is where earnings quality is really tested. If one project improves both margin and collections, then 2025 not only looks better, it is also measured on a friendlier base. That is why the impairment document treats it as a recovery year, but not as the year from which normalized profitability should be extrapolated.
That point also shows up in the final result of the same work. Value in use for Avrot Projects was estimated at ILS 6.211 million versus a carrying amount of ILS 6.807 million, which led to a goodwill impairment of ILS 596 thousand. In other words, even with future growth, even with gradual margin improvement, and even with a 1.5% terminal growth assumption, the model did not build a generous cushion. Quite the opposite. There is very little room for error.
What Has To Happen Before This Can Be Called Repeatable Profit
For the market to start treating the water-projects activity as a segment that has genuinely moved from loss to stable profitability, another pretty operating-profit number will not be enough. Four concrete things need to happen.
First, a larger share of 2026 revenue has to move from probabilistic status into signed status. As long as almost half of the next-year revenue forecast still depends on open tenders, the thesis is not closed.
Second, gross margin needs to stay comfortably double digit after the exceptional project rolls off. If 2026 ends up near 13%, the read will be that the model was right and 2025 was the outlier. If the activity holds a stronger level without one project dominating the picture, that will already look like a real quality change.
Third, low working capital needs to prove it is a business characteristic rather than a one-project gift. If the working-capital ratio jumps back up, even a positive operating-profit line could look weaker on earnings quality.
Fourth, the revenue base needs to become better diversified. Not because concentration is always bad, but because in a small contracting segment, profit built on one project is profit that still has not proved it belongs to the whole activity.
Conclusion
The water-projects profit in 2025 is not an illusion. There was a real improvement. But it is also not profit that can simply be taken, annualized, and treated as the new normal. The annual report shows how sharp the improvement was. The impairment work shows how narrow it was.
That is exactly the point an investor can miss on first read. The tempting headline is the 14.3% operating margin. The fuller picture is that more than half of the segment revenue came from one project, that the same project likely improved working-capital terms as well, and that the company itself already builds 2026 around a 13% gross margin, a 1.9% operating margin, and a meaningful contribution from probabilistic tenders.
That is why 2026 is not a clean harvest year for 2025’s success. It is a proof year. If Avrot can convert more open tenders into signed revenue, hold a decent margin without another exceptional project, and show that the working-capital improvement was not a one-off, then the segment can legitimately be said to have stepped up. If not, 2025 will mostly be remembered as the year one unusually good project painted an entire segment.
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