Melran in Q1: Series G bought time, not a margin fix

Melran opened 2026 with two improvements that matter: cash jumped to NIS 107.6 million after the Series G bond issue, and credit-loss expense almost disappeared in the quarter. Those figures reduce near-term pressure and show that the company can still raise debt after a difficult year. Still, the quarter does not close the test left from the end of 2025: the average net credit portfolio grew 26.7%, but net financing income fell 11.4%, and portfolio IRR declined to 14.5%. Net profit rose to NIS 12.8 million mainly because provisions dropped, not because the financing spread improved. The NTA collection arrangement has already produced NIS 10.4 million of receipts, but Stage 2 credit increased to NIS 43.1 million and deeply overdue debt rose versus year-end 2025. Q1 therefore looks like a quarter that bought the company time, not a quarter that proves a full reset: the next proof points are margin stabilization, a Stage 2 reduction through collection, and preservation of the new cash cushion after dividends and a possible buyback.

A Larger Book, Lower Net Financing Income

The company is a non-bank lender to businesses, real-estate developers, infrastructure contractors and financial-services providers. Its economics are not driven by portfolio growth alone, but by the spread between the yield charged to customers and the cost of funding, after credit losses. In Q1, that spread moved against it.

Financing income totaled NIS 40.4 million, up only 2.0% year over year. At the same time, the average net credit portfolio reached about NIS 1.115 billion, compared with about NIS 880 million in the comparable quarter. The company held far more credit assets, but did not receive the same net contribution from them: net financing income fell from NIS 28.0 million to NIS 24.8 million.

The business explanation matters more than the accounting change. The cheaper Series C bonds were repaid, more expensive sources replaced them, and competition in transactions backed by tangible collateral pressured pricing. The company also points to a temporary effect from the March fighting and the February Ramadan period on deal execution, lien registrations and legal collection activity. That softens the reading of the quarter, but it does not solve the issue: higher funding costs and competition over quality secured credit are broader economic problems.

Profit sharpens the point. Pretax profit rose to NIS 16.9 million and net profit to NIS 12.8 million, but finance expenses jumped to NIS 15.7 million. What held the bottom line was the credit-loss line: only NIS 116 thousand in the quarter, compared with NIS 3.8 million in the comparable quarter. That is a positive development, but it also makes earnings highly sensitive to whether provisions really remain low.

NTA Started Paying, But Stage 2 Has Not Fallen

The key checkpoint from earlier Deep TASE coverage of the funding test and the infrastructure exposure was straightforward: Stage 2 had to decline through collection, mainly through the NTA arrangement. Q1 delivered a partial positive answer. Exposure to the long-standing infrastructure customer fell from about NIS 49 million at the end of 2025 to about NIS 41 million, and the company received NIS 10.4 million under the arrangement.

That is not a minor detail. In March, the NTA arrangement could still be seen as a legal path that needed to prove itself. Now there are actual receipts, and the arrangement is progressing according to its timetable. The economic repayment source is tied to contracts and cash flows from government entities, a protected collection mechanism and priority in receipts. That weakens the full-default thesis around the infrastructure exposure.

But it is not enough to close the event. Of the roughly NIS 41 million exposure, about NIS 20 million is still classified as Stage 2 and about NIS 21 million as Stage 1. The reason is that some projects under the arrangement have explicit minimum payment amounts, while others still do not. Until that portion receives a signed payment floor or is collected in cash, Stage 2 remains a risk focus.

The broader credit-quality picture is mixed. Stage 3 is far below early-2024 levels, a real improvement. But Stage 2 rose to NIS 43.1 million, versus NIS 39.6 million at the end of 2025, and debts overdue by more than 181 days rose to NIS 39.4 million from NIS 28.5 million at year-end. Compared with March 2025 this is still lower, but versus year-end it is a reminder that an almost zero provision charge is not the end of the story.

Series G Filled the Cash Balance and Left the Capital-Allocation Question

Cash is the most visible change in the quarter. At the end of 2025, the company had only NIS 1.4 million of cash. In Q1, the balance jumped to NIS 107.6 million. The change did not come from operating cash flow. Cash flow from operations was negative NIS 3.3 million, and the cash increase mainly came from the Series G bond issue, which brought in about NIS 103.0 million net of issuance costs.

The right lens here is all-in cash flexibility: what remains after actual cash uses, not only accounting profit. In that frame, Series G bought the company time. The bonds are unlinked, carry a fixed annual interest rate of 7.66%, and amortize in ten semiannual payments from March 2028 to September 2032. That improves liquidity and duration, but adds a funding source that is not cheap for a business already facing a decline in portfolio IRR.

The funding mix also changed. Total credit and bonds stood at NIS 927.1 million, compared with NIS 784.6 million at the end of 2025. The company reports total credit lines of about NIS 615 million, of which about NIS 264 million is undrawn and about 63% is committed. After the reporting date, the board approved an increase of about NIS 50 million in non-material bank credit lines, but effectiveness depends on signing binding agreements that had not been signed when the financial statements were approved. That is a possible source, not cash already received.

The capital-allocation question returned quickly. In March, the company paid a NIS 7.0 million dividend. In May, it approved another NIS 6.35 million dividend, and updated its policy to quarterly distributions based on net profit, capped at 50% of annual profit. It also approved a buyback plan of up to NIS 5 million through May 2027. Each amount is small relative to the credit portfolio, but together they say something about priorities: immediately after the cash balance was rebuilt with new debt, the company is signaling that returning cash to shareholders remains high on the agenda.

The yellow flag is not the distribution itself. The company meets its covenants, equity totaled NIS 323.9 million, the equity-to-assets ratio was 27.8%, and Series G is rated ilA- with a stable outlook. The yellow flag is the gap between rising net profit and negative operating cash flow, and between a cash balance built by debt issuance and a policy that continues to send cash out before the spread and collection story has stabilized.

Conclusions

Melran's Q1 strengthens the near-term financial side of the story and weakens only part of the concern around the infrastructure exposure. The company raised debt, refilled its cash balance, collected from the NTA arrangement and reported higher net profit. On the other side, the financing spread is still under pressure, Stage 2 has not declined, and operations still do not fund portfolio growth internally. The current conclusion is cautious: the company has received time to prove 2026, but has not yet shown that profitability can improve without help from low provisions and debt issuance.

What will drive the market reading over the next few quarters is not the mere existence of a higher cash balance, but what happens to it after dividends, possible buybacks and further portfolio growth. A real improvement would require net financing income to stabilize, NTA receipts to keep reducing Stage 2, and credit-loss expenses to remain low without further growth in overdue debts. The counter-thesis is strong enough to matter: the rating, equity base, credit lines and receipts already collected suggest the market may be too harsh on the risk. But as long as a larger portfolio produces less net financing income, the 2026 test remains economically open even if immediate liquidity looks better.