Shoval Engineering: The Balance Sheet Is Stronger, but 2026 Must Prove the Backlog Can Turn Into Cash

Getting To Know The Company

Shoval Engineering is no longer just a contractor with a few development projects on the side. By the end of 2025 it looks primarily like a residential developer with a very large pipeline, a broad urban-renewal platform, a still-small but potentially expanding income-producing arm, and an execution business that lets it keep a meaningful part of the value chain in-house. That is exactly what makes the company easy to misread: the report shows higher revenue, higher equity, and very large headline figures for units and expected revenue, but the amount of value that is already accessible in cash is much smaller than the headline opportunity.

What is working now? Revenue rose to NIS 517.8 million, gross profit rose to NIS 80.2 million, equity climbed to NIS 409.1 million, and the equity-to-balance-sheet ratio under the bond-deed definitions stands at 32%, far above covenant thresholds. In early 2026, two additional income-producing assets also received Form 4, so the recurring-income arm should look more meaningful in 2026 than it did in 2025.

What is still not clean? New apartment sales weakened materially, operating cash flow was negative, and the company relied on equity and bond issuance in 2025 to fund the next leg of growth. That means the core question for 2026 and 2027 is not how large the backlog is, but how quickly and how cleanly that backlog moves into project financing, sales, delivery, and surplus release.

There is also an important screen-level point. The current market cap is about NIS 428 million, almost at the level of equity of NIS 409 million. The market is giving some credit to the stronger balance sheet, but it is not assigning a full look-through value to the billions of shekels of expected revenue and gross profit. The likely reason is simple: most of that value still has to pass through permits, financing, equity commitments, sales, and cash conversion.

Shoval's Economic Map

Those charts make the core point clear. Almost all of the 2025 economic weight still sits in residential development, while the recurring-income arm is still closer to future value than to current cash contribution. At the same time, most of the housing inventory sits outside the immediate execution stage. Anyone reading Shoval as if it were already a diversified recurring-income platform, or as if all of the backlog were close to turning into cash, is moving too quickly.

Events And Triggers

Capital markets moved to the center of the story. In January 2025 Shoval completed its IPO. In February 2025 it issued Bond Series B, and in September 2025 it expanded that same series. In total, the company raised about NIS 303 million gross in equity and bonds during 2025. That materially improved balance-sheet flexibility, but it also makes clear that the move to the next scale was not funded by internal cash flow.

The company bought time and pipeline. In June 2025 it acquired Shechtman Projects, which advances three urban-renewal projects in Haifa and Tel Aviv-Jaffa, with about 292 units in total, including 224 units for sale. The deal strengthens the urban-renewal engine, but it also adds more execution, financing, and capital demands before that value becomes accessible.

The residential platform kept expanding through tenders. In December 2025 the company won a tender in Rechasim for 148 units, and through an associate it won rights in Ma'ale Adumim for a 403-unit project. Those wins expand the future portfolio, but they also push a large part of the value further into later years.

The income-producing arm moved closer to a real test. In January 2026, after the balance-sheet date, two additional income-producing assets received Form 4: Beit Shoval ART in Mevo Carmel and the Miller project in Yokneam. That is a real trigger, because 2025 still reflects a very small recurring-income arm. If 2026 starts to show meaningful NOI from those assets, the quality of the Shoval story improves.

Management also changed. In October 2025 Yishai Rot became CEO, replacing Moshe Miller, who remained chairman. That is not just a personnel update. For a company moving from privately led entrepreneurial growth to a public, balance-sheet-driven platform, the difference between a founder-builder and a management team that can run scale, capital, and the public market matters much more.

That chart is one of the keys to reading 2025 correctly. In the fourth quarter Shoval sold more units than in the comparable quarter, 83 versus 69, but the value of those sales fell to NIS 103.6 million from NIS 126.8 million. The reason is not simple unit weakness. It is a sharp shift in mix toward price-target units and away from free-market units. Looking only at the unit count misses the quality shift.

Efficiency, Profitability And Competition

The most important 2025 datapoint is not that revenue rose by 16.7%. It is that revenue rose in a year when new apartment sales collapsed to 177 units from 504 units in 2024. That means Shoval's 2025 income statement reflects revenue recognition from projects already in motion, not an acceleration in new demand. That distinction matters. The P&L looks better, but the forward sales tape looks less clean.

The company explicitly says the growth in development revenue came from revenue recognition in projects such as Shoval Ramat in Jerusalem, Shovalim Phase B in Yokneam, Migdalei Miller in Yokneam, and Park Tzameret in Acre. On the other side, projects that were completed, such as Mitzpe Almogi and Tzehala Banegev, no longer provide the same engine. So 2025 was more of a harvest year for an existing backlog than a build year for the next one.

The chart shows higher revenue and higher gross profit, but almost no improvement in gross margin. Gross margin slipped slightly from 15.7% to 15.5%. So this is not a story of sharply better project quality or clearly improved pricing power. It is more a story of a larger execution base, while financing costs, labor shortages, and wartime cost pressure are still sitting in the background.

This is also where a point many readers will miss becomes important. The company says outright that it is using more aggressive marketing models to stay competitive. Since 2024 it has offered indexation waivers, favorable payment schedules, and contractor loans. In 2025, about 30% of its free-market apartment sales used those marketing models. Revenue tied to those models was about NIS 64 million in 2025, including about NIS 46 million under favorable payment terms and about NIS 18 million via contractor loans.

The real issue is the economic cost of that choice. Shoval paid banks about NIS 0.7 million of cash interest on contractor loans. It also recognized a significant financing component that reduced transaction prices for revenue recognition purposes by about NIS 3 million, of which about NIS 1.4 million affected 2025 revenue recognition based on completion percentage. In other words, Shoval did not just sell fewer apartments. In part of the business it did close, it also supported demand with its own balance sheet.

There is another yellow flag here. On favorable payment terms, the company explicitly says there is exposure, but it cannot estimate the probability or scope of realization as of the report date. In plain language, for part of these sales the company did not run its own underwriting process on buyer repayment capacity. That does not mean the risk will crystallize. It does mean these sales should not be read as economically identical to standard sales.

The income-producing arm tells a different story. Rental and other revenue rose to NIS 3.6 million, and NOI rose to NIS 3.631 million from NIS 3.174 million in 2024. Occupancy in the active assets is 100%, and Beit Shoval Paz in Mevo Carmel already generates annual NOI of about NIS 7.4 million on a 100% basis. But the absolute size is still very small relative to the overall business. So even if the recurring-income arm is strategically attractive, it is not yet stabilizing the group's earnings profile.

The contracting business, by contrast, did expand. Revenue rose to NIS 37.9 million from NIS 21.8 million in 2024. That is not the heart of the thesis, but it does matter. A company that can both develop and execute has better control over budget, timelines, and operating delivery than a pure developer that relies almost entirely on third-party contractors.

Cash Flow, Debt And Capital Structure

Cash Flow

This is a case where the right frame is all-in cash flexibility, not normalized cash generation. The reason is straightforward: the live question in Shoval is financing flexibility, not the mature recurring cash power of a stable business. On that basis, 2025 was not a good cash year.

Operating activity consumed NIS 110.2 million, compared with positive operating cash flow of NIS 151.7 million in 2024. Investing activity consumed another NIS 19.3 million, and only financing activity, at NIS 162.9 million, closed the gap. The company ended the year with NIS 42.7 million of cash and cash equivalents, but the source of that increase was capital markets much more than operations.

When you break down the cash story, you can see exactly where the pressure sits. Trade receivables and unbilled revenue jumped to NIS 257 million from NIS 103.8 million. Construction inventory rose to NIS 465.8 million from NIS 392.2 million. Meanwhile, advances from apartment buyers fell sharply to NIS 39.3 million from NIS 119.3 million. In effect, Shoval moved from a model more heavily funded by customers to one more heavily funded by the company, banks, and the capital markets.

That chart explains why the report can look better on earnings while looking worse on cash. On the accounting side, working capital actually looks much better, moving from a deficit of about NIS 157 million in 2024 to positive working capital of about NIS 236 million in 2025. But that does not change the financing reality: a larger share of the burden moved back onto the company.

Debt And Covenants

The good news is that the debt picture is much more manageable than it was. Short-term bank and other debt fell to NIS 394.5 million from NIS 506.5 million. At the same time, bonds increased, with NIS 20.1 million classified as current maturities and NIS 343.1 million as non-current debt. That is a logical move. The company replaced part of its shorter bank funding with longer, tradable capital-markets funding.

Covenant headroom is wide. Equity stands at NIS 409 million, well above the NIS 200 million minimum in the bond deeds. The equity-to-balance-sheet ratio under the deed definitions is 32%, versus floors of 13.5% in Series A and 14% in Series B. Distribution restrictions are also far away, with 19% and 20% thresholds respectively. This matters: Shoval does not currently look like a company pinned against its covenants.

But it would be too comfortable to stop there. The improvement did not come only from profit growth or organic surplus release. It also came from the share issuance, the bond issuance, and the expansion of Series B. In other words, the stronger balance sheet is real, but it is partly a capital-markets achievement rather than an internally generated one.

Rates still matter. The group has exposure to prime-based debt of about NIS 375 million, and investees add another NIS 806 million, with the company's share of a 1% prime increase estimated at roughly NIS 5 million a year. That is not a thesis-breaker by itself, but it does mean the Shoval story remains sensitive to a tighter funding backdrop.

There is another layer that matters. In the solo statements, the company has a continuing negative operating cash flow profile. The board says this is not a warning sign, because the consolidated group has no liquidity issue and because it expects about NIS 470 million of net surplus and excess equity release by the end of 2027, including about NIS 179 million in 2026 and NIS 236 million in 2027. That is a reasonable explanation. It also sharpens the core risk: if surplus release is delayed, the entire solo-funding and capital-flexibility reading has to be revisited.

Outlook

Before getting into the forecasts, it is worth stating the five most important takeaways for 2026 and 2027:

• The 2025 report looks stronger than the underlying sales tape. Earnings improved, but new apartment sales weakened materially.
• The balance sheet improved, but not through internal cash generation. Capital markets filled a large part of the working-capital gap.
• The recurring-income arm is moving toward a real test. Two assets received Form 4, but 2025 still does not show a meaningful contribution.
• The urban-renewal pipeline is a very large option, not cash in hand. It still needs permits, financing, construction, and sales.
• Management itself is really describing a bridge year with a proof test. Even under the company's own assumptions, a large portion of the value sits beyond 2027.

The company presents a sharp increase in units under execution, from 792 in 2025 to 2,577 in 2026 and 3,946 in 2027 on a 100% basis. On the surface that sounds like a breakout year. In practice it is better read as a bridge year with a proof test. For those numbers to materialize, projects need permits, construction financing, equity, and enough economic profitability to survive higher funding and labor costs.

At a more concrete level, management estimates that 2,056 units in planning, including 1,287 units for sale attributable to the company, will receive full building permits and start execution by the end of 2026. In the directors' report, management also says seven projects are expected to enter financing during the coming year: Rechasim, Bialik Afeka, Elad, Mevo'ot Dromiyim in Haifa, Idar in Haifa, Golomb in Givatayim, and Uptown in Kiryat Bialik. Those are useful numbers, but they also define the bottleneck. Without financing, permits, and enough sales, the scale does not turn into accessible profit.

That chart is also easy to overread. The company presents cumulative expected surplus of NIS 1.27 billion from projects under construction and projects expected to begin within about two years, but under the same company assumptions only NIS 600 million is expected to be released by the end of 2027. More than half of the value sits beyond that period. So taking the NIS 1.27 billion headline and translating it directly into near-term value or capital flexibility is getting ahead of the actual timeline.

In income-producing real estate there is clearly a positive development, but it still needs proportion. Beit Shoval ART and the Miller project received Form 4 in January 2026. If they start generating real income, the recurring-income arm can look very different in 2026 than it did in 2025. But 2025 still contains only NIS 3.6 million of rental and related revenue. Until leasing, occupancy, and actual cash generation show up, that value remains in transition.

Another point worth watching is the associates layer. The group's share in equity-accounted losses rose to NIS 7.4 million, among other things because the Harakevet project in Tel Aviv, through UPTOWN, recorded about NIS 27 million of inventory impairment, with Shoval's after-tax share at about NIS 7 million. That is a useful reminder that moving into larger and more complex projects does not bring only upside. It also brings more execution and valuation risk inside associates and longer-duration projects.

The bottom line on the outlook is this: 2026 does not look like a clean harvest year. It looks like a proof year. If project financing comes through, if sales quality improves, if the recurring-income arm starts to contribute meaningfully, and if execution targets are met, the reading on Shoval improves. If sales continue to rely on favorable terms, if financing is delayed, or if surplus release keeps shifting right, the market is likely to continue treating Shoval as a large backlog with a tight cash-conversion profile.

Risks

Sales quality. This is the first risk that needs to sit plainly on the table. About 30% of Shoval's free-market sales in 2025 used marketing models that included financing benefits, favorable payment terms, or contractor loans. The company already absorbed cash and accounting costs from that choice, and for favorable payment terms it admits it cannot estimate the exposure if realization occurs.

Working capital and surplus release. The company moved to positive working capital, but that does not mean the pressure is gone. Receivables rose, buyer advances fell, and expected surplus release over the coming years is a key part of the solo funding story. Delays in financing, execution, or sales can push that release further out.

Urban renewal is both the growth engine and the risk engine. Shoval has 26 urban-renewal projects, with 4,185 units for sale attributable to the company and signing rates that often sit in the 67% to 90% range. That creates a large option value, but it also leaves the business dependent on more permits, more financing, more tenant signatures, and more partner coordination.

Associates and joint ventures. The loss in the Harakevet project through UPTOWN is a good reminder that not every unit of pipeline in an associate is clean, accessible value. In some projects the company has only an indirect economic stake, in some the capital burden is large, and in some an impairment or delay can erode equity-accounted earnings.

War, labor, and delivery risk. The company says the war led to labor shortages, delays in two projects, and two buyer compensation claims for late delivery, one for about NIS 1.3 million and one for about NIS 0.8 million after the balance-sheet date. The company made no provision based on legal advice that the delays meet the force-majeure definition. That may prove correct, but it still shows how sensitive the business is to external disruption.

Rates and funding. The company's exposure to a 1% prime increase is about NIS 5 million per year on its share basis. That does not break the story, but it does add friction at a stage when the entire model still depends on financing, equity deployment, and surplus release.

Conclusions

Shoval enters 2026 as a stronger balance-sheet company than it was a year earlier. That is the positive part. The less clean part is that this strength has not yet translated into strong internal cash generation, and new sales are still not providing enough evidence that the next growth leg will arrive as smoothly as the 2025 earnings statement may suggest.

The current Shoval thesis is a platform thesis that still needs to pass a conversion test. The balance sheet, the backlog, and the emerging income-producing arm support the story. Sales quality, working capital, and the need to bring more projects into financing are still the main blockers. Over the short to medium term, the market is likely to respond less to the sheer size of the backlog and more to whether 2026 shows cash, financing execution, and NOI rather than just more forecasts.

What has changed relative to the older, simpler reading on Shoval is that the company no longer looks like a small developer with a hard capital constraint. It is already at a different stage. It has public equity, two bond series, a larger pipeline, and a real chance to operate at a higher scale. What has not changed enough is the need to prove that all of this can actually convert into accessible cash and clean sales.

The strongest counter-thesis is that the company may look larger than its cash generation really allows: the backlog is huge but much of it is far out, sales have weakened, more demand is being supported by financing incentives, and 2026 to 2027 still need to go almost right on financing and execution for the cleaner thesis to hold.

What could change the market reading over the short to medium term? Actual entry of the highlighted projects into financing, operational contribution from Miller and ART, better sales quality without heavier incentives, and a smaller gap between accounting profit and cash flow. On the other hand, delayed financing, more working-capital pressure, or more signs that sales are being preserved mainly through favorable terms would weaken the story.

Why does this matter? Because in residential development, value is often created well before it becomes accessible. Shoval has already shown that it knows how to build scale. Over the next 2 to 4 quarters it needs to prove that it can also turn that scale into cash, NOI, and profit that really flows back to shareholders.