R.G.A. in the first quarter: cash improved before the Joseph Morris and diesel test

R.G.A. reported a first quarter that repairs part of the main concern from the previous coverage: growth is starting to show not only in revenue, but also in gross profit and operating cash flow. On a pro forma basis, revenue rose 28.3%, gross profit nearly doubled, and trade receivables fell versus year-end 2025 despite higher activity. That is a positive sign in a business where backlog alone is not enough, because each new municipal contract requires employees, vehicles, fuel, and customer credit before it turns into cash. Still, this quarter is only a first test: the Joseph Morris acquisition closed after the balance-sheet date and was financed with a NIS 72 million bank loan, while diesel prices rose after the quarter by roughly 30%. The current read is therefore that the company entered 2026 in better shape than it appeared at the end of 2025, but the year is no longer just a growth year. It has become an absorption year for acquisition, fuel, and debt, in which the market will test whether the cash improvement belongs to the business model or mostly to one quarter of favorable timing.

An essential service, but not an easy business to fund

R.G.A. is a municipal services company: waste collection, open-area and institutional cleaning, and heavy fleet operation for local authorities and public bodies. This is a relatively essential activity. During the war and security operations, the company’s work routine was barely hurt, and the local authorities it serves continued to operate normally.

But the economics are not light. Winning and operating a tender requires vehicles, employees, subcontractors, fuel, and customer financing. In the previous annual analysis, the central checkpoint was that gap: a large backlog proves there is work, but it does not prove that the work funds itself. The first quarter gives an early sign that the gap narrowed, but not that it disappeared.

The economic map of the quarter is simple. Open-area and institutional cleaning still produces about two thirds of revenue and more than three quarters of gross profit. Waste collection is the activity management wants to grow, especially after the Joseph Morris acquisition, but in the first quarter it still did not carry most of the profit. The existing base has already improved cash flow and profitability. The new deal is meant to change the mix, but it also increases the financing load.

The quarter improved only on the pro forma base

The regular accounting comparison with the first quarter of 2025 is misleading, because the comparative period included R.G.A. only from February 6, 2025. The right comparison base is the company’s pro forma disclosure, as if the acquisition had been completed on January 1, 2025. On that basis, the quarter looks better than a mere technical jump.

Service revenue reached NIS 121.7 million, versus NIS 94.8 million in the pro forma comparative quarter. Gross profit rose to NIS 16.3 million from NIS 8.3 million, and gross margin increased from 8.8% to 13.4%. The company attributes the improvement also to new projects with better gross profitability and to indexation components embedded in customer contracts.

That matters because it speaks to growth quality. A contractor-like service business can grow revenue through more employees and more equipment without improving profitability. Here, at least in the first quarter, revenue rose faster than direct cost. Pro forma operating profit rose to NIS 8.9 million from NIS 6.1 million, and pre-tax profit rose to NIS 6.1 million from NIS 4.5 million. That run-rate does not by itself explain the 2026 forecast, but it is a better starting point than the open question left at the end of 2025.

Waste is growing, but cleaning still carries the profit

R.G.A. frames the Joseph Morris acquisition as a way to increase the weight of waste activity. In the investor presentation it stresses that most of the acquired activity’s projects are in waste collection, and that the deal is expected to increase activity turnover by about 20% and pre-tax profit by about 35%. That direction can improve the company if waste actually benefits from scale, an internal garage, and better fleet utilization.

The first quarter does not prove that yet. Waste collection generated revenue of NIS 40.3 million and gross profit of NIS 3.8 million, implying a gross margin of 9.4%. Open-area and institutional cleaning generated revenue of NIS 81.4 million and gross profit of NIS 12.5 million, implying a gross margin of 15.3%. In practice, cleaning supplied about 77% of quarterly gross profit.

This does not contradict the Joseph Morris deal, but it defines the next test. If the acquisition shifts more revenue into waste without improving that segment’s profitability, the company will be larger but not necessarily better. If the garage, fleet, and scale reduce maintenance and operating costs, the new mix can start to justify itself. The difference should appear first in the waste segment’s gross margin, and only later in total profit.

Cash worked before the acquisition

The encouraging part of the quarter is in cash flow and working capital. Operating cash flow reached NIS 7.9 million, versus NIS 2.3 million in the comparative quarter. Trade receivables fell from NIS 111.8 million at the end of 2025 to NIS 100.0 million at the end of March 2026, even though activity grew. The company attributes this to collection efforts and shorter customer days.

That is exactly what was missing at the end of 2025. If revenue grows while receivables grow faster, the business needs more credit to support itself. In the first quarter the opposite happened: receivables fell, cash flow improved, and reported CAPEX was only NIS 5.5 million versus NIS 50.0 million for all of 2025. Operating cash flow already includes interest paid of NIS 1.9 million. After reported CAPEX and lease principal repayment of NIS 0.9 million, the all-in cash picture leaves a surplus of about NIS 1.5 million before financing activity. That is far better than the end-2025 picture, but not enough to fund a NIS 72 million acquisition or a major fleet expansion by itself.

The equity offering changed the balance sheet. The company raised gross proceeds of about NIS 46.0 million, and financing cash flow includes NIS 44.2 million of net issuance proceeds. At the same time, it repaid NIS 45.5 million of bank loans and received NIS 5.2 million of new loans. Short-term credit fell from NIS 75.1 million at year-end 2025 to NIS 37.8 million at the end of March 2026, and equity rose to NIS 149.7 million. On covenants, the company had relatively comfortable room: tangible equity of 41% versus a 20% minimum, equity of NIS 149.7 million versus a NIS 70 million minimum, and net financial debt to EBITDA of 1.5 versus a ceiling of 4.

But the Joseph Morris loan was taken after the reporting period, on April 19, 2026, in the amount of NIS 72 million, for seven years and 84 monthly payments. The loan has no collateral and no financial covenants, which is positive for flexibility. From the shareholders’ perspective, however, the debt still has to be repaid from future cash flow. The first quarter proves that the company can improve collections before the deal. It does not yet prove that the enlarged platform can carry the deal after closing.

2026 has become an absorption test

The Joseph Morris acquisition closed on April 26, 2026. The consideration structure includes NIS 50 million paid at closing, NIS 20 million in ten fixed monthly installments, and then a check of any remaining unpaid balance. Of the first payment, NIS 14 million was an acceleration versus the original agreement, and the final settlement should also include interest for the accelerated payment at prime plus 1.5%.

The deal may bring an operating advantage: roughly 80 dedicated vehicles, a garage, an existing sanitation activity, and the experience of the sellers and their team. But the company has not yet completed the initial accounting treatment for the business combination under IFRS 3 and has not completed the purchase price allocation to identifiable assets and liabilities. The next quarters need to show what exactly was purchased, how much of the consideration turns into tangible or intangible assets, and how it affects depreciation, tax, and profitability.

Diesel sits above the deal. The company operated a fleet of about 500 vehicles before the acquisition, while the presentation already refers to about 600 vehicles and heavy equipment units after Joseph Morris. After the reporting period, diesel prices rose by about 30%, and the company believes this may have a material impact on results. This is the most concrete industry risk in the quarter: just as the company expands its fleet and waste activity, a central cost component becomes more expensive.

The company’s 2026 pre-tax profit forecast is NIS 42 million. It includes Joseph Morris for only three quarters and the impact of the macroeconomic environment, mainly diesel inflation. After a first quarter with NIS 6.1 million of pre-tax profit, the company needs to generate about NIS 35.9 million of pre-tax profit in the next three quarters to reach the forecast. That is an average quarterly run-rate of about NIS 12.0 million, almost double the first quarter. The forecast is not impossible if Joseph Morris contributes quickly, but it makes the second half of 2026 a sharp execution test.

R.G.A. entered 2026 with better proof than one might have expected this quickly: pro forma growth, a sharp improvement in gross margin, lower receivables, and operating cash flow that supported the quarter’s regular CAPEX. The conclusion remains cautious because the real test started after March 31. The Joseph Morris acquisition increases the opportunity, but also adds debt, monthly payments, integration work, future depreciation, and higher fuel exposure. The near proof point is whether cash flow stays positive after Joseph Morris, whether receivables remain under control, and whether the NIS 42 million 2026 pre-tax profit forecast gets numerical support rather than only an acquisition narrative.