TSG 2025: The Business Grew, but the Test Has Shifted to Capital Allocation

Understanding the Company

At first glance, TSG looks like a straightforward defense software company riding stronger defense budgets, war-driven demand, and export optionality. That is only part of the picture. In practice, it is already a two-engine group. One engine is the defense business, command-and-control systems, intelligence, recording, monitoring, AI, and broader integration projects. The second engine is a civil stack selling software and services to municipalities, cyber monitoring, call-center systems, and property and mapping solutions. In 2025 the defense engine drove most of the scale, but the investment case no longer rests only on defense demand. It now rests on a different question: can management turn a strong operating year into a disciplined expansion platform.

What is clearly working now is easy to see. Revenue rose 33.6% to ILS 430.3 million, reported operating profit rose 39.0% to ILS 37.2 million, and net profit reached ILS 16.3 million. Operating cash flow also increased to ILS 55.5 million. On the business side, defense demand is strong, backlog is high, and the company successfully brought Puzzle, PSI, and Ashad into the numbers. At the same time, early 2026 already pushed the story into a new phase: another equity raise, an MOU for MGroup, a binding deal for Mabat, and two additional non-binding moves in the low-altitude air-defense theme.

What is still not clean is not demand. It is discipline. 97.6% of 2025 revenue still came from Israel, and 59.7% of sales came from just three customers. Operating cash flow is positive, but once you look at the full cash picture after acquisitions, investments, leases, and dividends, the business did not fund 2025 from internal cash generation alone. At the same time, the narrative the market may want to buy today, a broader municipal platform on one side and a fuller low-altitude defense stack on the other, is still larger than the revenue base that has actually passed through the income statement.

As of April 3, 2026, market cap stood at about ILS 2.1 billion, while short interest was only 0.67% of float, below the sector average of 0.84%. This is not a crowded skeptical setup. The market is giving TSG credit. That means 2026 will not be judged on whether the company can post one more good quarter. It will be judged on whether it can justify that credit without losing control of deal pace, earnings quality, and capital discipline.

Events and Triggers

The core point is that early 2026 matters almost as much as 2025 itself. The annual report closes a record year, but it also marks the handoff from a company doing targeted acquisitions to a company trying to rebuild itself as a much wider platform.

The acquisitions already inside the numbers

Three acquisitions were already built into 2025. Puzzle, acquired at the end of 2024, was consolidated into the income statement from January 1, 2025. PSI was consolidated from July 1, 2025. Ashad was consolidated from November 1, 2025. At the consolidated level, those transactions matter because they show why a straight-line reading of growth would be misleading. This is not just the same company selling more. It is also a wider group buying additional engines.

That is the bridge from the old story to the new one. Until recently, TSG could still be read as a defense systems company with a supporting civil layer. After 2025 it has to be read as a company using a stronger defense base, and newly raised capital, to build a much broader capability stack.

What is being built after the balance-sheet date

The moves that did not fully enter 2025 already show that appetite has expanded. In January 2026 the company signed a non-binding MOU to acquire 100% of a civil business aligned with its activity, for an initial ILS 15 million plus contingent consideration of up to ILS 25 million. In March 2026 it disclosed multiple non-binding negotiations for acquisitions with an aggregate potential size of about ILS 600 million, with most of that amount aimed at the municipal field.

The clearest step-up came on March 16, 2026, when TSG signed a non-binding MOU to acquire about 96% of MGroup at an equity value of about ILS 520 million. This is where the story changes scale. Based on data provided to TSG, which the company itself emphasized had not been audited or reviewed, MGroup could contribute about ILS 0.5 billion of revenue at EBITDA margins similar to TSG’s consolidated level. If that transaction closes, it will not be a small add-on. It would be larger than TSG’s current civil activity and would materially change both the growth profile and the risk profile.

A low-altitude defense layer is being assembled in parallel

At the same time, the company is building a new defense story around low-altitude threat interception. On March 22, 2026 it signed a binding agreement to acquire Mabat 3D Technologies. At closing, TSG will pay about ILS 14.4 million, subject to cash and net debt adjustments, while total consideration at closing plus the excess consideration mechanism cannot exceed about ILS 45 million. There are also additional possible payments tied to collections and or orders in 2026 that are outside that cap.

Mabat itself is still small, ILS 17.8 million of revenue and ILS 4.0 million of operating profit in 2025, but it matters because of what it represents. TSG is trying to connect command-and-control, sensors, detection, mapping, and operational response into a fuller solution. At the same time it also signed two non-binding MOUs, a USD 9 million investment in RoboTiCan for 26% on a fully diluted basis plus a USD 2 million secondary purchase, and an MOU to acquire Production Floor for USD 5 million plus contingent consideration tied to 2026-2028 performance.

This is the heart of the story. TSG is trying to build two platforms at once, a broader municipal platform and a broader low-altitude defense stack. That is not just upside optionality. It is also a sharp increase in managerial load and capital usage.

Export is beginning to move, but it is still small

There are real export signals. In June 2025 the company received a first order from a US company, worth hundreds of thousands of dollars, covering software licenses for detection solutions and a command-and-control system to be supplied alongside the US company’s defense system for American military units. In December 2025 it received orders from a Czech company worth about ILS 4.4 million for a demonstration site and laboratory tied to air-picture solutions and tactical C2.

But the proportions still matter. In 2025 all revenue outside Israel totaled just ILS 10.2 million. The international story exists, but inside the financials it is still an option layer rather than the base economy of the company.

Total backlog at year-end 2025 was ILS 345.5 million, almost unchanged from ILS 346.3 million a year earlier. At first glance that looks flat. That would be the wrong read. The company explicitly says this figure excludes Ministry of Defense orders worth about ILS 60-70 million that were expected in the fourth quarter of 2025 but were delayed because of state-budget approval timing and were actually received in the first quarter of 2026. So the backlog is not signaling weak demand. It is signaling timing.

Efficiency, Profitability and Competition

The central point here is that the improvement is real, but investors need to separate three different things: genuine operating improvement, the effect of acquisitions, and the still-large gap between reported and adjusted economics.

The numbers are good, but the reported story is less dramatic than the presentation

Reported gross profit rose to ILS 104.0 million, and gross margin improved to 24.2% from 22.8% in 2024. Reported operating profit rose to ILS 37.2 million, and operating margin improved to 8.6% from 8.3%. That is a solid step up, but it is not a blowout. The presentation leans heavily on adjusted measures, and there the picture looks much sharper: adjusted operating profit of ILS 57.5 million and adjusted net profit of ILS 34.6 million.

That difference is not cosmetic. In 2025 reported net profit was ILS 16.3 million, while adjusted net profit was ILS 34.6 million. The gap came from share-based compensation net of tax of ILS 6.9 million, acquisition and offering expenses of ILS 2.3 million, and amortization of intangible assets net of tax of ILS 9.1 million. Anyone buying the story through the presentation alone sees a business that looks far more profitable than what actually reached the IFRS bottom line.

This is not an accounting error. It is an earnings-quality issue. As long as TSG stays in acquisition mode, intangible amortization and transaction costs will remain part of the real economic story, even if management prefers to push them aside to show “core” performance.

Growth was not evenly distributed

The 2025 growth was not broad-based. Defense revenue rose 44.8% to ILS 336.5 million, while civil revenue increased only 4.5% to ILS 93.8 million. At the adjusted segment level, defense operating profit rose to ILS 35.9 million, and civil adjusted segment operating profit rose to ILS 12.1 million. It is notable that the civil segment actually posted a higher adjusted segment margin, 12.9% versus 10.7% in defense, but it remains much smaller and therefore does not explain the overall step-up in scale.

The revenue bridge is also uneven inside the product lines. Intelligence, recording, monitoring, control, and cyber systems rose to ILS 119.2 million from ILS 86.1 million. The consulting, testing equipment, and operational systems engineering line jumped to ILS 75.2 million from ILS 10.8 million. By contrast, the call-center activity declined to ILS 36.4 million from ILS 38.5 million. So the growth did not come from everywhere. It came from a few clear pockets.

The fourth quarter also sends an important message. Revenue increased to ILS 114.8 million from ILS 109.8 million in the third quarter, but operating profit fell to ILS 8.6 million from ILS 10.1 million, and net profit dropped to ILS 3.5 million from ILS 4.7 million. Financing expense in the fourth quarter climbed to ILS 6.4 million from ILS 4.4 million in the third quarter. Even inside a record year, year-end already reminds investors that financing structure matters almost as much as sales.

The moat is real, but it is concentrated

TSG does have a real moat. It rests on long experience in defense systems, familiarity with defense development and procurement processes, and the ability to serve both as a direct supplier and as a subcontractor inside larger programs. The company itself stresses that a key advantage in this field is actual operational use, in routine periods and in wartime, and that is hard to replicate.

But that same moat is also concentration. The Ministry of Defense contributed ILS 155.6 million in 2025, IAI added ILS 52.4 million, and Customer C added ILS 49.0 million. Together that is nearly 60% of revenue. The Ministry of Defense and IAI alone account for 48.3%. That structure creates both a moat and dependency. When the main customer orders more, the business jumps. When state-budget timing slips, revenue recognition can slide as well.

Cash Flow, Debt and Capital Structure

The key point is that TSG’s balance sheet looks stronger today, but 2025 was not funded purely from core internal generation. To read it correctly, investors need to separate the business’s recurring cash-generating ability from the full cash picture after all uses.

The right framework here is all-in cash flexibility. In other words, how much cash is left after the period’s actual uses. In 2025 TSG generated ILS 55.5 million of cash from operations. Against that, it paid ILS 45.5 million for newly consolidated acquisitions, another ILS 0.8 million in contingent consideration, another ILS 8.0 million in deferred consideration, ILS 7.5 million of capex, ILS 10.2 million of lease principal, and ILS 5.0 million in dividends. Even before bank-debt repayments of about ILS 40.4 million, the all-in picture is already negative.

Put simply, the operating business does generate cash, but the expansion strategy is consuming it faster than the business produces it. That does not mean the company is in trouble. It does mean that the internal engine is not yet sufficient on its own to fund organic growth, acquisitions, shareholder distributions, and debt reduction at the same time.

If we switch to the narrower normalized / maintenance cash-generation lens, the picture looks better. After ILS 55.5 million of operating cash flow, reported capex of ILS 7.5 million, and lease principal of ILS 10.2 million, the business still generated about ILS 37.8 million. In other words, the core business can produce cash. The issue is not the operating core. The issue is that management already wants that cash to do far more than one job.

The balance sheet is stronger, so the bottleneck is not covenants

At year-end 2025 the company held ILS 149.5 million of cash and cash equivalents, ILS 5.8 million of short-term deposits, and ILS 2.1 million of marketable securities. Against that, bank debt stood at ILS 114.0 million. On a conservative basis, cash, short deposits, and marketable securities exceeded gross bank debt by about ILS 43.4 million. Equity as a share of assets rose to 42.9% from 30.7% a year earlier.

The more important point is covenant room. The company’s debt-coverage ratio, as defined in its financing agreements, stood at about negative 0.9 versus a maximum threshold of 5.5. That means covenants are not the near-term pressure point. If anything, the company entered 2026 with comfortable room and then enlarged that room even further with a private placement of ILS 192 million in January 2026, followed by early repayment of another ILS 24.6 million of bank debt.

So the right read of the balance sheet is not “the company is stretched.” The right read is “the company is well equipped and now gets to decide how aggressive it wants to be.” That is a different risk, one that depends more on management judgment than on lender pressure.

Outlook

The main takeaway is that 2026 looks like a transition year with a heavy proof component. Not a distress year, and not a clean breakout year. A transition year, because the company has already proved it can grow, but has not yet proved it can digest everything it is trying to build on top of that growth.

Five points need to stay front of mind for 2026:

• Defense demand does not look like the problem. Backlog remains high, and the company explicitly says that Ministry of Defense orders worth about ILS 60-70 million slipped from the fourth quarter of 2025 into the first quarter of 2026 for budget-timing reasons.
• The international defense story is still ahead of the numbers. There is a first US order, a Czech foothold, and a clearer export narrative, but the foreign revenue base is still tiny.
• The civil arm could change very quickly. If MGroup progresses, it could be larger than TSG’s entire current civil activity. That could create a step-change, but it would also fundamentally alter integration load and risk.
• The bottleneck is not immediate financing. After the capital raises, the company has room. That means the market will focus on whether the balance sheet is being used intelligently, not just whether deals can be closed.
• The next key metric is not just revenue. It is whether higher deal volume can coexist with disciplined reported earnings and a cash profile that does not deteriorate.

What has to happen over the next 2 to 4 quarters

The first thing is execution. Mabat is already acquired, so the coming reports need to show whether that deal actually starts broadening the solution set without increasing complexity faster than economic benefit. The second thing is clarity. MGroup is still non-binding, and the revenue and EBITDA indications were based on data provided to the company and not verified by it. Any real progress will require much more clarity on terms, financing, and actual synergy.

The third thing is conversion. TSG is talking about a fuller low-altitude defense solution. That is a compelling narrative, but the market will need to see a bridge from acquired building blocks to orders and programs that show up meaningfully in revenue and margins. The fourth thing is discipline. The company will not be judged only on how many transactions it can sign. It will also be judged on how many it knows not to sign.

The bottom line for outlook: 2026 is a proof year inside a transition year. The operating base is strong enough to support a broader strategic experiment, but that same base could get blurred if the transaction layer grows faster than the company’s ability to absorb it.

Risks

The key point is that TSG does not face one single risk. The risk set is a combination of customer concentration, defense regulation, integration load, and capital-allocation appetite.

Customer concentration and budget timing: nearly 60% of revenue comes from three customers, and most of backlog rests on government bodies, defense entities, and municipalities that have cancellation-for-convenience rights. The company argues, based on long operating history, that those rights are unlikely to be exercised in practice. Even so, the slip of Ministry of Defense orders from late 2025 into the first quarter of 2026 already shows that timing alone can matter.

Integration and acquisition risk: this is now the heaviest risk to the thesis. The company has already absorbed Puzzle, PSI, and Ashad, and wants to keep moving with Mabat, MGroup, and additional transactions. Every deal may improve the solution set or widen the addressable market. Each one also adds managerial complexity, integration risk, funding needs, and the possibility that the business becomes harder to read.

Export approvals and regulation: a meaningful share of the new defense upside rests on foreign markets, but the company itself makes clear that parts of the product set depend on export and marketing licenses and on broader regulatory approvals. Both the US order and the Czech orders depend on those approvals. So the path from opportunity to realized revenue goes through regulation, not just demand.

Interest-rate and FX risk: management’s own sensitivity analysis shows that a 1% move in interest rates affects profit by about ILS 1.2 million, while a 5% move in the dollar affects profit by about ILS 1.6 million. The company does use short and targeted hedging, but it does not present a fully insulated position. As long as a bigger part of the future growth plan depends on foreign markets, that sensitivity remains relevant.

Human capital and wartime execution: the company notes that many employees served in reserve duty during the period and that it was still recruiting dozens more employees by the reporting date. That is not a side issue. In a business built on projects, systems integration, and knowledge-heavy services, the human bottleneck directly affects the ability to deliver ongoing work and absorb acquisitions at the same time.

Conclusions

TSG ended 2025 with a stronger operating base, a high backlog, and a defense business still benefiting from a supportive demand environment. The main constraint is no longer whether the company has a market. It is whether it can widen itself without damaging the quality of the economic story. In the near term, the market will focus less on what happened in 2025 and more on what happens with Mabat, MGroup, and the Ministry of Defense orders that have already slipped into 2026.

Current thesis: TSG’s core business is good, but the stock will now be driven mainly by capital-allocation quality and integration discipline rather than by one more strong quarter on its own.

What changed in this cycle is fairly clear. TSG has shifted from an execution-and-growth story into a company trying to create a strategic step-change through acquisitions. That can work. It can also create a layer of complexity that gets ahead of the company’s ability to turn it into shareholder value.

The strongest counter-thesis: the caution here may prove too conservative. TSG does have a real moat, the balance sheet is stronger, defense demand is healthy, and backlog gives 2026 a base. If one of the larger transactions closes on reasonable terms and financing, the company could exit the coming year materially larger and more diversified without meaningfully damaging the capital structure.

What could change the market reading over the short to medium term is a combination of three things: clean execution and integration of Mabat, real clarity around MGroup if that deal progresses, and proof that backlog and orders are turning into cash rather than only into presentations. On the other hand, more transaction layering without similar progress in reported earnings and cash generation would push the discussion back toward capital-allocation quality very quickly.

Why does this matter? Because TSG is no longer just a systems supplier benefiting from strong markets. It is testing whether a quality operating base can be turned into a broader platform. The gap between success and failure in that kind of move is not just a few margin points. It is a different kind of company.

If over the next 2 to 4 quarters TSG shows clean Mabat integration, real clarity on MGroup, conversion of delayed orders into revenue and cash, and continued positive room between liquid assets and debt even after new deals, the thesis strengthens. If instead the transaction layer grows faster than reported earnings and cash, that will be a sign that the company is trying to move faster than its structure can carry.