R.G.A.: The waste pivot makes sense, but cash flow still has not caught up

Company Overview

The easy mistake in reading R.G.A. is to think the company has already solved the puzzle. On the surface this is exactly what investors like to see in a municipal-services operator: a 1.39 billion ILS backlog, exposure to about 40 local authorities, a fleet of roughly 500 vehicles and heavy-duty units, tender wins, a post-year equity raise, and an acquisition that promises to shift the center of gravity toward what sounds like a better business. But one layer down the real question is not whether there is work. There is. The real question is who finances that work, how quickly it turns into cash, and whether the move from cleaning to waste collection is already visible in the operating numbers or still lives mainly in the presentation and investor call.

What is working now is fairly clear. The company has built broad operating reach, runs a meaningful fleet, and keeps winning and renewing tenders. In 2025 it reported revenue of 380.5 million ILS, gross profit of 46.0 million ILS and net profit of 37.0 million ILS. After year-end it also completed an equity raise of about 46 million ILS gross, a move that improved its ability to keep expanding. As of April 9, 2026, market capitalization stood at about 346.7 million ILS, so the market is already assigning value to the new public platform, not just to the existing service activity.

The problem is that this reading is still not clean. Operating cash flow was only 7.1 million ILS. Year-end cash was 2.1 million ILS, against 128.0 million ILS of bank debt and 15.1 million ILS of lease liabilities. Even before the Joseph Morris deal, this was already a company that needed fleet, working capital and bank lines in order to serve its backlog. That makes 2026 look less like an automatic harvest year and more like a proof year: can the company close the new acquisition, increase the share of waste activity, and show that growth can travel through cash flow and not just through backlog and balance-sheet expansion.

There is also a deeper paradox here. Management has been consistent in arguing that the strategic direction is to move the business away from cleaning, a labor-heavy activity that is usually thinner, toward waste collection and sanitation, where operating efficiency should be stronger. That story makes intuitive sense. Yet in 2025 the segment numbers still do not prove it. Cleaning delivered 269.9 million ILS of revenue and 35.4 million ILS of gross profit, while waste delivered 110.6 million ILS of revenue and 10.6 million ILS of gross profit. Put differently, the pivot exists in the narrative, but most of the gross profit still sits in the old engine.

A quick economic map helps explain why the story attracts attention but still needs proof:

• The company operates in two activities: cleaning of open areas and institutions on one side, and waste collection on the other. In 2025 cleaning represented about 71% of revenue and waste about 29%.
• Backlog already exceeded 1.39 billion ILS. Roughly 827.7 million ILS came from cleaning and 562.4 million ILS from waste.
• At year-end the company had 1,097 direct employees. Management's presentation describes a broader operating workforce of about 2,200 people, with roughly half of them outsourced workers. That explains why subcontractors are the largest line in cost of sales.
• Just three material customers generated 125.3 million ILS in 2025, about one third of revenue, and the company does not disclose their names.
• The public capital layer grew after year-end, but so did dilution potential: alongside 327.99 million issued shares, the company now has three listed warrant series and additional option packages for management and the chairman.

That is the key data point, because it says the R.G.A. story is no longer just “a cleaning company that is growing.” It is also not yet “a higher-quality sanitation platform with better operating economics.” The company is in the middle. This is already a public platform with ambitions to become an environmental-services consolidator, but the valuation of that journey now depends on two practical questions: can backlog be converted into profit and cash without consuming the balance sheet, and will the Joseph Morris acquisition actually change the economics of the business or merely increase financing complexity.

Events and Triggers

Trigger one: 2025 was the year the public platform was built. The merger with Value was completed in August, the company became listed, and during the same year it distributed total dividends of 15 million ILS. That matters because R.G.A. did not come to market as an early-stage operating story. It arrived as a platform trying both to grow and to return capital. At first glance that looks like confidence. On a second look it sharpens how confident management must be in funding growth through a mix of banks, public equity and repeated tender wins.

Trigger two: the company keeps expanding the order book. Management's presentation counted ten tenders from the start of 2025, four new and six renewed, with annual scope of about 147 million ILS and total scope of about 854 million ILS over the contract periods. After the balance-sheet date the company also added a new municipal tender with annual scope of about 22.8 million ILS and total scope of about 114 million ILS assuming full exercise of the options. This is the part that supports the thesis: the company keeps winning, and the backlog is real.

Trigger three: the Joseph Morris deal is the truly important event. In February 2026 R.G.A. signed an agreement to acquire the full activity of Joseph Morris & Sons Sanitation Services together with the full share capital of one of its subsidiaries, for total consideration of 72 million ILS. Of that amount, 36 million ILS is to be paid at closing and another 36 million ILS over 18 equal monthly installments. In addition, the two selling shareholders are supposed to provide consulting services at 50% employment each for at least 24 months, for a combined monthly fee of 120 thousand ILS plus VAT.

What matters here is not only the size of the deal but the direction. According to the filing, the acquired company and the acquired activity together have 18 active projects, with about 80% of them in waste collection. Based on the unaudited figures attached to the report, the acquired activity and subsidiary together generated roughly 95.8 million ILS of revenue in 2025, 13.6 million ILS of profit before tax and 10.5 million ILS of net profit. In management's presentation the message is even sharper: the deal is supposed to add about 20% to revenue and about 35% to profit before tax. If that happens, the mix of the company changes meaningfully. If it stalls, a large part of the 2026 story remains at the level of intention.

Trigger four: the deal is still not closed. The annual report and the transaction filing make clear that closing remains subject to material conditions precedent, mainly the approval of the Competition Authority, written consents from local-authority customers of the acquired subsidiary, and the approval of the relevant bank. This is exactly where management's tone changes. On the investor call the company explained that it did not issue updated guidance because the Joseph Morris closing is being delayed by regulation. That is an important signal. Management is optimistic, but it also understands that the central step of 2026 has not yet become fact.

Trigger five: the February 2026 equity raise explains how the company chose to deal with that gap. R.G.A. issued 38,978,300 shares and 19,489,150 series-3 warrants and raised about 46 million ILS gross. The controlling shareholder's explanation on the investor call was direct: it is better to enter a growth transaction with a strong balance sheet than to stretch debt further. That reduces immediate financing risk, but it also effectively admits that the public platform still cannot fund the next growth step from operating cash flow alone.

Trigger six: the equity-compensation layer and the share sale between the controlling shareholder and the chairman add practical friction. In December 2025 the company recorded a 7.757 million ILS expense related to a share sale between controlling shareholder Yaniv Bendor and chairman Daniel Levantal. The company was not party to the transaction, the expense was recorded against capital, and total equity did not change, but the charge still hit the operating line and made the fourth quarter harder to read. After year-end another 2.89 million options were approved for the chairman and 1.73 million options for the CEO. This is not a thesis-breaker on its own, but it is a real actionability constraint that public shareholders need to factor in.

Efficiency, Profitability and Competition

The central point is that management talks about a move toward a better business, but 2025 still does not show it in the segment numbers. That does not mean management is wrong. It does mean the pivot is not yet proven. Cleaning generated about 269.9 million ILS of revenue and 35.4 million ILS of gross profit in 2025, a 13.1% margin. Waste collection generated 110.6 million ILS of revenue and 10.6 million ILS of gross profit, a 9.6% margin. As long as that is the picture, investors need to read the waste-shift story as a strategic promise, not as an achievement already embedded in reported results.

That gap matters because management builds most of the forward narrative on it. On the investor call the company explicitly said it is shifting the center of gravity from cleaning work, which is more labor based, toward waste collection, where operating efficiency should be better. But the annual report still shows that at this stage cleaning is both the larger engine and the segment producing more gross profit. So 2026 is the test: either the relationship changes through new tenders and Joseph Morris, or the story remains mainly a good idea.

The quarterly chart also says something important. Revenue rose from quarter to quarter, from 63.0 million ILS in the partial first quarter to 112.0 million ILS in the fourth quarter, but gross profit weakened in Q4 to 12.7 million ILS from 15.1 million ILS in Q3. That is not necessarily structural deterioration, but it is not something to wave away either. The notes include a 2.734 million ILS other expense tied to an operating failure by a subcontractor, and management explained on the investor call that Q3 was seasonally strong while Q4 reverted toward a level closer to Q1 and Q2. In other words, the quarterly shape is a reminder of how sensitive this model is to execution on the ground.

The cost structure reinforces that reading. Cost of sales in 2025 was 334.4 million ILS, of which 185.4 million ILS was subcontractors, 95.5 million ILS wages and related expenses, 35.7 million ILS vehicle and equipment maintenance, and 15.1 million ILS depreciation. This is not a software model built on code, brand or platform economics. Profitability depends on a precise combination of labor, suppliers, fleet, maintenance and scheduling. That is why backlog has limited meaning without a well-funded operating machine behind it.

This is where one non-obvious insight from the purchase price allocation becomes useful. When Value acquired R.G.A., the valuation work tested whether customer relationships or order backlog had meaningful standalone value. The conclusion was that their separate value was negligible. The reason is not that there are no customers or no backlog. The opposite is true. The reason is that the economic value depends mainly on fixed assets, working capital and the workforce required to execute those contracts. That is an accounting sentence with a very large business implication: backlog is not a self-standing asset on the shelf. It only works if fleet, labor and financing keep supporting it.

The sensitivity disclosures also show that part of profitability is built on indexation mechanics rather than on clean pricing power alone. A 1% increase in minimum wage is expected to add 1.832 million ILS to revenue, but expenses would still increase by about 916 thousand ILS because roughly half of the revenue increase is expected to roll through to subcontractors. That is interesting: wage indexation can be a tailwind, but the company does not keep all of it. Fuel tells a similar story. Diesel expense was 17.972 million ILS in 2025, and a 10% increase in diesel prices would add 1.797 million ILS of cost. So even if the company benefits from index-linked tenders, it is not truly insulated from cost pressure.

On competition, the report describes a fragmented but not empty market. The company identifies three major national players in waste collection and points to reputation, experience and fleet as entry barriers. That sounds reasonable. But revenue still depends on repeat wins in municipal tenders, accurate pricing, and the ability to post guarantees and meet service standards. The report also notes that during the year petitions were filed against four tender wins, and two were still open around the reporting date. So the moat exists, but it is administrative and operational, not absolute.

Another easily missed issue is customer concentration. The three material customers together generated 125.3 million ILS, about one third of revenue, and the company does not name them. It does disclose average payment terms of net 90-plus days, and it says many contracts include a generic 30-day cancellation right for the municipality. The company argues, based on past practice, that exercising that right is rarely practical. Maybe so. But in terms of revenue quality, it still means a large part of the business sits on large public customers, long payment cycles, and contracts where the counterparty has broader legal flexibility than the backlog headline suggests.

Cash Flow, Debt and Capital Structure

The most important number in the report is 7.1 million ILS. That is 2025 operating cash flow. Against it stand 37.0 million ILS of net profit, 17.9 million ILS of profit before tax, and a management presentation that highlights 25.6 million ILS of continuing-operations profit before tax. The gap does not prove the profit is fake. It does tell us that earnings have not yet turned into cash in a satisfying way.

The main reason is working capital. Changes in operating assets and liabilities reduced cash flow by 45.2 million ILS. Within that, higher trade receivables from R.G.A. reduced cash by 12.8 million ILS, other receivables by 5.9 million ILS, payables and other current liabilities by 12.4 million ILS, and deferred taxes by 17.9 million ILS. That fits the business model well: the company provides services to municipalities, operates on net-90-plus payment terms, and must keep fleet and labor in place before cash arrives. So even when revenue shows up, the cash box does not necessarily fill.

There is another way to read the same point. At year-end the company had 111.8 million ILS of receivables, of which 14.4 million ILS was overdue in some form, while cash stood at only 2.1 million ILS. Working capital was positive by only about 7 million ILS, a very narrow cushion for a business built on financed fleet, public tenders and high operating intensity. This is exactly the type of company where “there is backlog” is not enough. The real question is how much of that backlog already sits in receivables, and how long it takes to convert it into real cash.

This is an all-in cash-flexibility bridge, meaning after actual cash uses. It does not ask what the business “could have” produced before growth; it asks how much cash remained after what the company actually did. The picture is clear. Operating cash flow did not cover 50.0 million ILS of CAPEX, 7.3 million ILS of lease repayment, 3.3 million ILS of bank debt repayment, and 4.2 million ILS of cash dividend. Add the fact that total dividends for the year were 15 million ILS, of which 10.8 million ILS was offset against related-party balances, and the result is a company that chose both to distribute capital and to keep investing while relying in practice on the balance sheet and the banking system.

To be fair, it is also worth saying what is working. During the year the company received 60.3 million ILS of new bank loans and largely used them to finance vehicle purchases. That is its operating model: buy fleet against contracts and tenders and spread the financing over the engagement period. The report says this explicitly. From the standpoint of business economics, that is not automatically negative. It is the infrastructure that allows the company to grow. But from the public-shareholder standpoint, it means profitability always has to be judged together with what it demands from the balance sheet.

At the end of 2025 the financing picture looked like this: 75.1 million ILS of short-term bank credit and loans, 52.9 million ILS of long-term loans, and 15.1 million ILS of lease liabilities. A 1% increase in interest rates would reduce profit before tax by about 1.28 million ILS, according to the report. At the reporting date the company was in compliance with its financial covenants, including debt to EBITDA not above 4 and working capital to short-term credit not below 100%. That matters, but without disclosed headroom it is hard to read this as a thick safety buffer. What can be said is that management understood the constraint and chose to strengthen equity before trying to close Joseph Morris.

That brings us to the most practical point for shareholders. The February 2026 equity raise did strengthen the balance sheet. Management's presentation even showed a “current” equity level of around 145 million ILS, versus 100.2 million ILS at year-end 2025. But that kind of strengthening does not come for free. The company added almost 39 million shares in the offering, issued about 19.5 million new public warrants, and now has three listed warrant series totaling about 37.3 million instruments. On top of that there are management and controlling-shareholder option packages. So the practical constraint on the thesis is clear: even if the company is right to prefer equity over more expensive debt, public investors still need to assume that any value created on the way will be spread across a meaningfully wider capital base.

Guidance and What Comes Next

Four non-obvious points define 2026:

1. Backlog on its own does not prove quality. Even the purchase-price-allocation work hinted at that by assigning no meaningful standalone value to backlog or customer relationships.
2. The move toward waste has not yet been proven in the segment numbers. It may arrive through Joseph Morris and newer tenders, but it is not yet visible in the 2025 reported mix.
3. Reported net profit in 2025 looks stronger than the underlying cash economics. The 24.1 million ILS tax benefit from loss carryforwards materially supported the bottom line while operating cash flow remained weak.
4. The balance sheet is stronger, but the price was dilution. Strategically that may be sensible, but it raises the performance bar for every future shekel of earnings.

From management's point of view, 2026 is supposed to be a better year. On the investor call the company said gross profitability should improve and move closer to the levels seen in Q3 as older and less profitable tenders roll off, newer ones replace them, and Joseph Morris is completed. That is important, but there are two caveats. First, the company itself said it is not publishing updated guidance until the deal closes. Second, the report still does not prove that the improvement is already here. So it is more accurate to read 2026 as a proof year rather than an automatic breakout year.

The backlog certainly gives the company raw material for such a year. Out of the 1.39 billion ILS total, about 403.3 million ILS is expected to be recognized in 2026, including 145.6 million ILS from waste and 257.7 million ILS from cleaning. Another 315.1 million ILS is already assigned to 2027. So commercial visibility looks good. But backlog only creates value for common shareholders if it passes three tests at the same time: margins, working capital and financing.

The Joseph Morris deal matters on both sides of that equation. On the positive side, if it closes on the reported terms it really could do what the company says it should do: increase the weight of waste activity, add about 80 vehicles and equipment units, add a garage and workshop, and potentially improve efficiency. On the negative side, it also adds complexity. Consideration is staggered, the deal is subject to closing conditions, it needs consents from customers and a bank, and it comes with a monthly consulting cost for at least two years. In other words, the same move that is supposed to improve business quality could also put more pressure on financing and integration.

There is another point worth noticing. The earlier memorandum of understanding from January 2026 described the target in more promotional terms, including about 88 million ILS of annual revenue, about 18 million ILS of annual gross profit, and about 13 million ILS of pretax operating uplift. The later definitive agreement moved to a more grounded description of consideration components and unaudited 2025 figures for the acquired operations. That is a healthy change. It is also a reminder that the transaction still has to move from promise to reality.

In the nearer term the market is likely to focus on four checkpoints. The first is whether the transaction actually closes and gets Competition Authority approval. The second is whether the next quarters show a recovery in gross profitability after a softer fourth quarter. The third is cash flow: do receivables keep swelling the balance sheet, or does the company start converting more activity into cash. The fourth is capital discipline: is the February raise enough to get through 2026, or will the company need another layer of debt or equity.

Risks

Risk one is working capital, not demand. The company is not struggling to find work. It needs to finance that work until municipalities pay. Average payment terms of net 90-plus days, 111.8 million ILS of receivables, and just 7.1 million ILS of operating cash flow create exactly the kind of tension that explains why even a large backlog can still produce pressure.

Risk two is variable-rate financing. At the end of 2025 total bank debt stood at 128.0 million ILS, and every 1% increase in interest rates cuts profit before tax by about 1.28 million ILS. The company was within covenants, but Joseph Morris, continued fleet renewal and heavy working-capital needs could turn financing from a secondary issue into the key test point.

Risk three is backlog quality. The report discloses generic cancellation rights for customers, administrative petitions against some tender wins, and dependence on three major customers whose names are not disclosed. The company may be right that in practice it is hard for a municipality to replace a contractor overnight. But from an investor standpoint this is still a backlog that must pass a service test, a legal test and a pricing test.

Risk four is execution. The subcontractor event in the fourth quarter, which cost 2.734 million ILS, was a reminder that margins can be hit fairly quickly. The company operates a large system of workers, subcontractors, fleet, drivers and maintenance. Any break in that chain affects profit almost immediately.

Risk five is regulatory and legal. The company disclosed labor and subcontractor claims totaling about 8 million ILS with estimated exposure of about 1.7 million ILS, third-party traffic claims with estimated exposure of about 1.1 million ILS, an ongoing VAT audit whose outcome cannot yet be estimated, and tender petitions of which some were still open. None of that looks existential right now, but it is a reminder that the company operates deep inside a world of regulation, tenders and administrative law.

Risk six is dilution. The equity raise was the right move from the standpoint of financial conservatism, but it is not neutral for shareholders. The listed-warrant layer and equity-compensation packages mean that even if operations improve, ownership will sit on a much wider share base.

Conclusions

R.G.A. ends 2025 as a company that looks more interesting than it did a year ago, but not cleaner. It has scale, backlog, fleet, good tender access, and a capital raise that lets it think bigger. Against that, cash still is not flowing at the pace the narrative suggests, and the pivot toward a better waste mix still has to move from statement to result.

Current thesis: R.G.A. is building a public sanitation platform with real potential to improve earnings quality, but 2026 is a proof year in which the company still has to show that backlog and strategy can move through cash flow and not only through balance-sheet expansion.

What changed is not the existence of a capable operating company. What changed is that the business has become a public platform trying to grow through acquisitions and capital markets. That can create a step-up. It also introduces three new frictions into the story: financing, dilution and integration.

The strongest counter-thesis is that the market may already have bought the upgrade story too early. If Joseph Morris is delayed, if waste margins do not improve, and if receivables keep sitting on the balance sheet instead of turning into cash, R.G.A. could remain a fleet-heavy, working-capital-heavy services contractor telling a better story than the cash it produces.

What could change the market's interpretation in the short and medium term is fairly clear: closing the acquisition, issuing updated guidance, recovering gross margin after the fourth quarter, and showing a real improvement in operating cash flow. If these happen together, the read on the company can improve quickly. If one of them breaks, especially cash flow or the deal, the story becomes much less clean.

Why does this matter? Because in R.G.A. value will not be determined by the number of tenders alone. It will be determined by the ability to run a heavy, financed and growing operating system without eroding common shareholders along the way.

What has to happen over the next 2-4 quarters for the thesis to strengthen is straightforward: Joseph Morris has to close, the weight of waste activity has to rise visibly, operating cash flow has to move materially above the 2025 level, and there should be no new financing or dilution surprise. What would weaken the thesis is also straightforward: more capital raised to fund the same growth, margins that do not improve, or a backlog that stays large on paper but still does not become cash.