Mer: Better margins and less debt, but the backlog is weaker than the headline

Getting To Know The Company

Mer enters 2026 in better shape than it entered 2025, but not for the reason a quick read might suggest. If you look only at revenue, you get a nearly flat year, NIS 666.4 million versus NIS 663.7 million, up just 0.4%. The deeper read is much more interesting: gross profit rose 11.7% to NIS 132.6 million, operating profit rose 15.8% to NIS 60.2 million, and net profit rose 19.8% to NIS 41.3 million. This was not just a volume year. It was a quality year.

The problem is that the improvement did not come from broad, clean growth across the whole business. It came from a sharp mix shift, mainly toward Israel, communications infrastructure, and military technologies, while the global segment weakened and Homeland Security economics deteriorated. So by the end of 2025, Mer looked like a stronger business, but also like a business that still needs to prove that the improvement is structural rather than simply the result of elevated defense demand, a few better projects, and tighter financial discipline.

That is also why the NIS 843.5 million backlog headline can mislead. That figure includes framework agreements. The firmer layer, the transaction price allocated to unsatisfied or partially unsatisfied performance obligations, fell to NIS 628.3 million from NIS 668.3 million. The gap between the framework-inclusive backlog and the contractual layer widened from NIS 191.7 million to NIS 215.2 million. In other words, backlog did not collapse, but it is not as clean as the headline suggests.

What is working right now? Israel. The Israel segment grew 16.5% to NIS 334.1 million, segment profit almost doubled to NIS 24.5 million, and military technologies jumped 40.4% to NIS 107.2 million. The balance sheet also no longer looks like the main bottleneck. Net financial debt fell to NIS 33 million, equity rose to NIS 164.5 million, and the company was not merely in compliance with covenants, it was comfortably inside them. What is still missing? Proof that the improvement can hold even if the defense wave cools, and proof that Mer can convert concentrated global backlog into cash without rebuilding working-capital pressure.

Mer’s economic map for 2025 looks like this:

The implication is clear. Mer may still look externally like a mixed defense, HLS, telecom, and data-center platform, but 2025 already marks a transition. Israel rose to 50% of group revenue from 43% a year earlier. This is not just a geographic shift. It is a change in the economic core of the group.

Events And Triggers

Trigger one: 2025 was explicitly helped by the defense environment. The company says the war had a material positive effect on activity because order volumes grew in military technologies and communications infrastructure. That matters because it explains part of the improvement, but it also means the result was not detached from the security backdrop.

Trigger two: New business kept arriving into early 2026. In January and February 2026, several defense agreements were signed for roughly NIS 20 million, mainly in the military-technologies activity within Israel. In addition, the company disclosed roughly NIS 50 million of agreements across the global and Israel segments, including a first customer in an EU member state. That number alone does not change the year, but it does support the view that the defense-driven momentum did not end with 2025.

Trigger three: The financing structure quietly improved in 2025. In March 2025, Mer signed new commitment letters with two banks and updated the terms with a third lender. The important part is not only the extension of terms. It is also the removal of the requirement to direct a meaningful portion of proceeds from non-core asset sales toward debt repayment, and the cancellation of an acceleration mechanism. In the second quarter, the company also added a new NIS 50 million banking line and shortly after repaid its full exposure to a non-bank lender ahead of time. This improved flexibility, not just pricing.

Trigger four: The Israel segment has a meaningful commercial anchor, a sole-supplier agreement with the Ministry of Defense in tactical communications for the land forces through 2032. That does not remove competition, but it does give Mer a stronger foothold in one of the markets it clearly wants to scale.

Trigger five: On the other side of the ledger, some of the global project content and some new contracts remain subject to regulatory approvals, including DECA approvals where required. So even when the order exists, the path to revenue can still be less smooth than the headline suggests.

Efficiency, Profitability, And Competition

The core point is that 2025 was much more about mix than about volume. A 0.4% revenue increase should not produce a near 20% jump in net income without a deeper shift underneath. At Mer, the change came from three places: more Israel, more military technologies, and a much better outcome in communications infrastructure.

The Israel segment was the clearest improvement engine. Revenue rose 16.5% to NIS 334.1 million and segment profit jumped 86.3% to NIS 24.5 million. Segment operating margin rose to 7.3% from 4.6%. That is not an elite margin, but it is a meaningfully healthier economic profile. The global segment went the other way, revenue fell 11.8% to NIS 332.2 million from NIS 376.9 million, and segment profit fell to NIS 38.1 million from NIS 44.4 million.

The more useful read is by activity engine rather than by segment label. Communications infrastructure rose 7.6% to NIS 259.3 million, and operating profit in that activity jumped to NIS 38.0 million from NIS 27.0 million. Margin improved to 14.6% from 11.2%. That is the sharpest improvement among the major engines. Military technologies jumped 40.4% to NIS 107.2 million, while operating profit rose to NIS 9.5 million. Homeland Security moved the other way, down to NIS 293.1 million from NIS 338.1 million, with operating profit cut to NIS 11.7 million from NIS 24.0 million. Margin there fell to 4.0% from 7.1%.

That is the important nuance. Mer’s 2025 improvement did not come from a uniform upswing in everything that sounds “defense.” It came mainly from Israeli military work and from communications infrastructure projects that became more profitable. Investors should therefore ask not only whether the company is becoming “more defense,” but which defense-related activities are actually generating the profit and which are mostly holding revenue with weaker economics.

The cost lines tell the same story. R&D rose to NIS 5.1 million from NIS 4.2 million, mainly because of AI capabilities and advanced military products. Selling, marketing, and G&A rose to NIS 66.8 million from NIS 58.6 million, mainly because of a broader commercial push in Israel and overseas. In other words, Mer is investing to force this transition forward. That is constructive, but it also means profitability did not improve only because of passive cost control. It still has to earn the improvement.

Fourth-quarter performance supports that read. Revenue rose to NIS 181.9 million from NIS 169.0 million, operating profit rose to NIS 18.1 million from NIS 13.3 million, and net profit rose to NIS 14.2 million from NIS 11.1 million. The year did not close on a weak note. It closed with momentum.

From a competition standpoint, Mer is not operating in soft markets. In communications infrastructure it faces local and global competitors and in some cases works as a subcontractor to large vendors, which pressures margins. In Israel it competes against players such as Nextcom, Baran Raviv, HaOman, Bynet, Motorola, Magal, and others. In military technologies it also competes against Elbit, Rafael, and Motorola. That is exactly why the sole-supplier Ministry of Defense agreement through 2032 matters. It does not eliminate competition, but it does create an anchor in a market where it is hard to build durable position.

Cash Flow, Debt, And Capital Structure

The key point here is that Mer’s balance sheet no longer looks like the first thing to worry about. In 2024 the right question was still whether the company was outrunning its own cash generation. In 2025 the answer looks much more comfortable.

Cash flow from operations rose to NIS 79.4 million from NIS 45.5 million. Cash rose to NIS 67.7 million from NIS 52.5 million. Short-term and long-term debt came down, and net financial debt fell to NIS 33 million from NIS 87 million at the end of 2024 and NIS 108 million at the end of 2023. Equity ratio rose to 31% from 23%, and equity increased to NIS 164.5 million.

Covenant headroom is also genuinely wide. Equity-to-assets was required to stay above 22%, and stood at roughly 30%. Equity was required to stay above NIS 90 million, and stood at roughly NIS 165 million. Net financial debt to EBITDA was capped at 5, and stood at roughly 0.49. EBITDA to finance expenses and current maturities could not fall below 1.25, and stood at 3.63. Put simply, this is no longer a near-covenant story. It is a company with real financial room.

Still, it would be too generous to flatten the story. Cash flow remains embedded in a project-heavy business where revenue recognition and working capital do a lot of the lifting. Trade receivables and contract assets fell to NIS 266.5 million from NIS 278.6 million, but inventory rose to NIS 91.8 million from NIS 76.8 million. Within receivables and contract assets, contract assets alone were NIS 140.5 million, which is still a large balance. In addition, other payables and accruals rose to NIS 148.5 million from NIS 115.2 million, while suppliers and service providers fell to NIS 81.5 million from NIS 95.1 million. So it is too simple to say that profit turned cleanly into cash. The right framing is that cash improved, but within a model that still depends heavily on contract accounting, execution timing, and inventory discipline.

The company itself hints at this. In the global segment, average customer credit days rose to 123 from 104, while supplier credit days rose to 79 from 63. In geographic terms, average credit days in Africa rose to 104 from 91. So even though 2025 looks much better from a cash perspective, the heavy project profile did not disappear.

When thinking about cash, the useful bridge here is all-in cash flexibility rather than CFO alone. In 2025 the company generated NIS 79.4 million from operations, but it also paid NIS 15.2 million of actual lease-related cash, invested NIS 11.8 million in fixed assets and intangibles, and reduced net financial debt by roughly NIS 39.8 million. After those core uses, all-in cash flexibility was about NIS 12.6 million. That is positive, but it also means the balance-sheet improvement came from strong operating cash being directed first toward deleveraging.

There is another important nuance. Despite retained earnings of NIS 63.2 million, the company has no dividend policy, and some of its lender commitments prohibit dividend payments without prior written approval. So the improvement in the balance sheet has already created operating and financial value, but it has not automatically turned into fully accessible shareholder value.

Guidance And The Road Ahead

The four findings that matter most for 2026 are these:

1. The real growth engine sits in Israel. Without the Israel segment, 2025 would not have looked like an improvement year.
2. The headline backlog stayed high, but the contractual layer declined. That is not a collapse, but it is clearly not acceleration either.
3. Balance-sheet stress eased, so the key test moves from financing to execution, concentration, and cash conversion.
4. Earnings are better, but they still come from a business where nearly half of revenue is recognized over time, so earnings quality still depends on estimates and project progress.

2026 looks like a proof year, not a breakout year. Mer has already shown that it can improve profitability and reduce debt. What it has not yet shown is that the new engines are large and stable enough to offset weaker global operations and do so without creating even higher concentration.

The first number to watch is the conversion of military technologies from good revenue into big revenue. The activity is already at NIS 107.2 million, but that is still only 16.1% of group sales. To truly reshape the company, it has to keep growing not only as a high-quality slice, but as a meaningful share of the whole.

The second number is backlog quality. 58.9% of unsatisfied contractual obligations are expected to be recognized within a year. That means the market will not have to wait long to test whether 2025 was the start of a new path or just one good year. If the company enters 2026 with solid conversion in the Israel book and further mix improvement, the read will improve. If conversion is slower, the NIS 843.5 million backlog headline will look thinner.

The third number is concentration. Two major customers already account for 45.3% of revenue, up from 36.8% a year earlier. One global customer alone represents 28.9% of consolidated sales, and one Israel customer is already 16.4%. That is not fatal, but it is also not comfortable diversification. Precisely because Mer is becoming a better business, it cannot afford for the improvement to rest on just two anchors.

The fourth number is global geography. Africa contributed NIS 209.3 million of 2025 revenue, and within the NIS 290.3 million global backlog, Africa carries most of the weight. That makes approvals, customer financing, and collections central parts of the thesis rather than side notes.

Risks

The first risk is customer concentration. The major global customer alone represented 29% of sales, and undrawn receipts from that customer stood at NIS 52.1 million, even if not overdue. Together with a major Israel customer, the top two accounts now represent nearly half of revenue. That is manageable concentration, but not something that should be ignored.

The second risk is backlog quality. The company likes to present a framework-inclusive backlog of NIS 843.5 million, but unsatisfied contractual performance obligations fell to NIS 628.3 million. That is not cosmetic. It means part of the headline still rests on potential rather than on closed work.

The third risk is working capital and revenue recognition. The company recognizes a meaningful portion of revenue over time, carries NIS 140.5 million of contract assets, and operates in projects where global customer credit days lengthened. As long as execution and collections stay on track, that is manageable. If execution slows, approvals are delayed, or a major customer stretches payments, pressure can return quickly through contract assets and inventory.

The fourth risk is regulation and defense export approvals. Some global project content is subject to regulatory approvals, including DECA approvals. The company itself notes that completion of some of the West Africa work depends on such approvals. In other words, the backlog there is not just a competition question, it is also a regulatory execution question.

The fifth risk is currency and interest rates. The group is exposed to the euro, Mexican peso, and Chilean peso against the US dollar, and only examines derivative use from time to time. At the same time, part of the debt carries floating interest. Net finance expense rose to NIS 16.8 million in 2025, partly because of exchange-rate effects and hedging results. The balance sheet is cleaner, but the business is still not insulated from FX.

The sixth risk is created value versus accessible value. Equity rose and leverage fell, but dividends still require lender consent. So even when the business creates value, not all of that value is immediately accessible to the common shareholder layer.

Conclusions

Mer exits 2025 as a better business, a more profitable business, and a less leveraged business. That matters. But it is still not a finished transition story. The Israel engine and military technologies are clearly pulling the business upward, while global and Homeland Security still remind investors that the transition is incomplete. In the near to medium term, market interpretation will depend less on whether 2025 was good and more on whether 2026 confirms that the improvement is structural.

Current thesis: Mer delivered a real upgrade in earnings quality and capital structure in 2025, but 2026 still has to prove that the shift toward Israel and military technologies is strong enough to offset weaker global activity and a less solid backlog mix.

What changed: The main risk has moved from balance-sheet stress to execution quality. A year ago the key question was whether the company could stabilize debt and cash. Now the better question is whether it can scale the right engines without leaning too heavily on a few customers and on framework-driven backlog optics.

Counter-thesis: It is possible that most of the 2025 improvement rested on unusually strong defense demand, one large global customer, and especially good communications-infrastructure profitability in Israel, which would make the year hard to repeat once conditions normalize.

What could change the market read: conversion of the new defense orders into revenue, expansion of the European customer base, stability in communications-infrastructure margins, and one simple question, whether the contractual layer of backlog starts growing again rather than only the headline number.

Why this matters: Mer is no longer being tested on survival. It is being tested on quality. If 2025 becomes a new base, the company can increasingly look like a cleaner defense-technology execution platform. If not, it will again look like a collection of project businesses with too much concentration.

What has to happen over the next 2 to 4 quarters for the thesis to strengthen, and what would weaken it: