Ilex Earnings Quality: FX, Derivatives, and Fair Value Versus the Operating Core
Ilex improved reported profit in 2025, but most of the improvement did not come from the operating core. Profit from ordinary operations before other income fell, while finance income and other income were lifted by FX, derivative revaluation, and fair-value gains.
The main article argued that Ilex finished 2025 with a stronger headline profit but a weaker operating core. This continuation isolates the forensic question: how much of the improvement actually came from the business, and how much came from FX, derivatives, and fair-value remeasurement.
The key number is simple. Profit from ordinary operations before other income fell by NIS 8.9 million, from NIS 64.8 million to NIS 55.9 million. Even so, profit from continuing operations rose by NIS 9.9 million, from NIS 45.7 million to NIS 55.6 million. The gap was filled mainly by net finance income, which jumped by NIS 19.2 million to NIS 21.3 million, and by other income, which rose by NIS 5.7 million to NIS 7.6 million.
That is not a claim that reported profit was wrong. It is a claim that the 2025 improvement was mainly a below-the-operating-line improvement, not a clean improvement in the operating core itself. For anyone trying to judge what can carry into 2026, that distinction matters.
The Earnings Bridge
| Item | 2024 | 2025 | Change | What it means |
|---|---|---|---|---|
| Profit from ordinary operations before other income | 64.8 | 55.9 | -8.9 | The core weakened |
| Other income, net | 1.9 | 7.6 | +5.7 | Fair-value and non-operating gains |
| Finance income, net | 2.1 | 21.3 | +19.2 | FX, derivatives, and interest |
| Share of losses of associates | -7.2 | -10.6 | -3.4 | Starget weighed more heavily |
| Income taxes | 15.9 | 18.6 | +2.7 | Part of the gain was absorbed by tax |
| Profit from continuing operations | 45.7 | 55.6 | +9.9 | The headline improved despite a weaker core |
This table is the core of the argument. The increase in profit from continuing operations did not come from day-to-day operating improvement. The opposite happened. The core business shrank, associate losses widened, and tax was higher. What covered that was a sharp jump in two lines that do not describe a cleaner operating story: finance income and other income.
The implication is not that all of 2025 profit was noise. That would go too far. The implication is that the year-on-year change relied mainly on more volatile items than the underlying distribution and medical-equipment business. That is why investors should not simply annualize 2025 reported earnings.
The Finance Line: Economically Hedged, Accounting-Noisy
The important point about the finance line is that it does not reflect a suddenly stable financial engine. Out of NIS 25.3 million of finance income in 2025, the three largest items were NIS 9.1 million of FX gains, NIS 7.2 million of fair-value gains on derivatives, and NIS 7.3 million of interest on short-term bank deposits. Deposit interest was almost unchanged versus 2024. Most of the swing came from the much more volatile components: currency and derivative revaluation.
| Finance-line item | 2024 | 2025 | Reading |
|---|---|---|---|
| Net FX gain | 1.0 | 9.1 | The biggest swing factor |
| Net fair-value gain on derivatives | 1.0 | 7.2 | Immediate mark-to-market |
| Interest on short-term bank deposits | 7.1 | 7.3 | Relatively stable, but not operating |
| Total finance expenses | -7.8 | -4.0 | Less drag than in 2024 |
| Net finance income | 2.1 | 21.3 | A NIS 19.2 million jump |
What matters most is the accounting mechanics. The group uses forward contracts and options to hedge currency risk, but it does not designate those derivatives as accounting hedges. That means fair-value changes flow immediately through finance. At the same time, supplier balances in foreign currency are retranslated continuously, while inventory is recorded in shekels based on invoice date and only reaches the income statement later when the goods are sold. The result is a timing gap: even when the company is managing the economic risk, the accounting profit can still move much earlier than the operating core.
This is not minor noise. In the sensitivity analysis, a 10% weakening of the functional currency against the dollar would have reduced 2025 pretax profit by about NIS 7.7 million, and the equivalent move against the euro would have reduced pretax profit by about NIS 1.8 million. Even on the company's own disclosure, currency can move the bottom line by an amount that changes the reading of the year.
The contracts are also short-dated, with maturities under one year. This is not a multi-year lock-in. It is a rolling hedge program. So there is no reason to assume that the 2025 finance line will repeat just because it appeared once in the annual report.
Other Income: More Fair Value, Less Core Business
If the finance line is volatile, other income is even further from the operating core. In 2025 it reached NIS 7.6 million versus NIS 1.9 million in 2024. In note 23, almost the entire line came from gains on financial assets measured at fair value through profit or loss, NIS 7.4 million, plus a very small capital gain of NIS 0.1 million.
The board report adds an important layer. It explains that the increase came mainly from the year-end remeasurement of the Starget SAFE investment and from gains in Medtechnica's securities portfolio. That matters because it shows how much 2025 relied on valuation-led gains rather than on cleaner operating progress in diagnostics and medical equipment.
That does not make the profit meaningless. It can reflect real value creation in the asset base. But it does not answer the narrower question investors care about here: did the operating franchises themselves become structurally better? For building a 2026 operating baseline, this line should be treated as secondary, not foundational.
| Component | 2025 | How closely it reflects the core | What to watch in 2026 |
|---|---|---|---|
| Profit before other income | NIS 55.9m | High | Margin recovery in diagnostics and Medtechnica |
| Deposit interest | NIS 7.3m | Low to medium | Cash balance and rate environment |
| FX and derivative gains | NIS 16.3m | Low | Volatility, not a base level |
| Other income | NIS 7.6m | Low | Fair value, not operating execution |
What the Quarterly Split Says
The quarterly split makes the point even more clearly. In the first quarter, the core still looked relatively solid, with NIS 15.4 million of profit before other income, but net finance expense of NIS 1.2 million and associate losses of NIS 2.0 million pushed profit from continuing operations down to only NIS 9.1 million.
In the second quarter, the picture flipped. Core profit fell to NIS 12.0 million, but net finance income of NIS 12.7 million lifted profit from continuing operations to NIS 16.9 million. In other words, the quarter with the weaker core delivered the stronger headline profit.
The fourth quarter was the clearest mismatch between the headline and the operating picture. At group level, core profit improved by only NIS 1.0 million versus the third quarter, to NIS 14.8 million. But profit from continuing operations jumped by NIS 7.5 million, to NIS 18.5 million, because the quarter added NIS 6.6 million of other income and NIS 6.5 million of net finance income.
Even inside the core, the improvement was not broad-based. Diagnostics profit before other income fell sharply to NIS 5.6 million in the fourth quarter from NIS 19.0 million in the third quarter. Medtechnica moved the other way, rising to NIS 6.9 million from NIS 0.8 million. So even the business itself remained uneven, while the bottom line looked smoother mainly because of the lines below it.
What Carries Into 2026
The 2026 test is simpler than the 2025 profit headline suggests. If Ilex can post similar net earnings while finance income and valuation gains cool, that would be evidence of genuine operating improvement. If the finance line normalizes and profit falls back, the conclusion would be different: 2025 did not establish a new earnings base, it benefited from a friendlier accounting year.
That is why the right screening order for the next reports starts elsewhere: first profit from ordinary operations before other income, then the gross and operating margins in diagnostics and Medtechnica, and only then the finance line. That sequence matters because 2025 finance income contained cash-interest income, FX gains, derivative revaluation, and a short-dated hedge program that does not qualify for hedge accounting.
The bottom line is that 2025 profit was real, but its base was noisier than the headline suggests. Anyone trying to understand Ilex in 2026 should first ask whether the operating core can rebuild margins without unusual support from currency, derivatives, and fair-value gains.
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