Danel in the first quarter: profit held up, but the nursing tender now has a price tag

Danel opened 2026 with a relatively strong quarter: revenue rose to NIS 729.6 million, operating profit rose to NIS 58.8 million, and net profit reached NIS 42.2 million, with no surrogacy loss weighing on the comparison period. But the quarter did more than improve the reported numbers. It put a price tag on the central risk of the year: if the nursing tender remains in its current form and is not corrected, the company estimates a roughly NIS 45 million annual operating-profit hit in the nursing segment before mitigation steps. That is almost half of the segment's 2025 operating profit, so this is no longer a generic risk note. The positive side is that the operating platform is still generating cash, HR services showed margin recovery, and special-needs services continued to grow. The less comfortable side is that medical services and HR were hurt in March by the war with Iran, that the business is heavily exposed to public-sector customers, and that dividends are already using part of the cash cushion. The quarter is therefore not a final answer. It is a bridge year: the nursing tariff, the pace of efficiency work, and the ability to preserve cash after leases and dividends will decide whether 2026 becomes a base for higher earnings or the last clean quarter before a new margin squeeze.

A steadier platform with deeper public-sector dependence

Danel is a labor-intensive services company built around four main engines: nursing, special-needs frameworks, HR services, and medical services. Its economics are not driven by one product or a technology layer. They depend on the ability to operate large service systems for public and private customers, recruit labor, manage regulation, and preserve enough margin in activities where wages and tariffs determine a large part of the result.

The quick map of the first quarter starts with one number: roughly 85% of group revenue came from public-sector customers. Nursing is almost entirely public-sector funded, special-needs services are entirely public-sector funded, and part of HR and medical services also comes from public customers. That explains why the company can look diversified by segment while still being highly sensitive to tariffs, tenders, budgets, ministry instructions, and public-sector payment cycles.

Group revenue rose 3.7% year over year, and operating profit rose 7.9%. Net profit rose from NIS 32.9 million to NIS 42.2 million, but part of that increase reflects the disappearance of a NIS 4.2 million loss from the surrogacy activity that was still included in the comparison period and was discontinued at the end of 2025. After that adjustment, the picture is less dramatic but still positive: the core activity is working, and the company increased operating profit despite a March disruption in medical services and HR.

The previous annual analysis focused on the nursing tender, HR earnings quality, and cash after leases and dividends. The current quarter closes part of that checklist and sharpens the rest: HR improves, nursing remains strong, but the tender risk has now been quantified and has become the main issue.

The nursing tender moved from legal risk to operating cost

The nursing segment delivered most of the group's operating proof in the quarter. Revenue rose 6.4% to NIS 391.2 million, mainly because of the minimum-wage increase, growth in treatment hours, and a higher number of patients. Operating profit rose to NIS 29.8 million from NIS 26.4 million, and the operating margin improved to about 7.6% from 7.2%.

The problem is that the strong quarter does not remove the tender risk. It makes it measurable. On April 26, 2026, the appeals around the new nursing tender were rejected by the Supreme Court, and the administrative petition to amend the tender provisions was scheduled for June 30, 2026. The company submitted its offer for the new tender on April 28, 2026, but it also quantified the potential damage: if the appeals are rejected, the tender terms are not corrected, and the tender remains in its current form, the annual operating-profit hit to the nursing segment and the group may be about NIS 45 million, based on 2025 activity and the known 2026 minimum-wage update.

That number changes how the quarter should be read. The nursing segment generated NIS 99.5 million of operating profit in 2025. A NIS 45 million hit, even before mitigation steps, equals about 45% of the segment's annual operating profit and about 22% of 2025 consolidated operating profit. Management says the actual impact may be materially lower following digitization, process improvements, efficiency measures, and possible acquisitions of activities or organizations in the field. That may be right, but the quarter does not prove it yet. It proves that the old nursing economics are still working, not that the new tender economics have already been absorbed.

Management's framing shows that the tender adjustments are not cosmetic. They involve process and reporting changes, billing-method changes with the National Insurance Institute, interface changes, transfer of caregiver salary data, and privacy and information-security adjustments. That is why the tender is not only a legal event. It can add cost and operating complexity to an activity whose margins are already not wide. Potential acquisitions of smaller players may help absorb part of the damage through scale, but they would also require management capacity, integration work, and cash.

HR improves, while medical services still need a full activity rebound

The best data point in the quarter is actually in the segment that looked weaker at the end of 2025. HR services grew revenue by only 1.1% to NIS 114.4 million, but operating profit rose to NIS 7.6 million from NIS 6.3 million, and the margin rose to about 6.6% from 5.6%. That does not yet prove a full return to higher margins, but it weakens the concern that the segment has become only a volume engine. After a year in which backlog and activity grew while the margin eroded, a quarter in which profit grew faster than revenue is a more practical signal than another explanation about the comparison base.

Still, this should not be overread. The company explains that segment revenue grew early in the period due to activity in the foreign-workers corporation in construction, while projects were hurt in March by the war with Iran. If that disruption continues into the second quarter, the first quarter will look less like a turning point and more like a good interim quarter before another operating interruption.

Special-needs services remained steadier. Revenue rose 7.1% to NIS 161.3 million, driven by a tariff update, higher occupancy in residential frameworks, and the opening of new schools. Operating profit rose to NIS 16.0 million, but the margin slipped slightly to about 9.9% from 10.2%, because of wage increases and higher input costs such as rent, food, medicine, and security. This is still a relatively high-quality activity within the group, but growth is not free here either: more frameworks and higher occupancy require real estate, labor, and public budgeting.

Medical services were the weak point of the quarter. Revenue fell 11.6% to NIS 59.7 million, and operating profit fell to NIS 5.8 million from NIS 6.8 million, mainly because the number of surgeries declined in March due to the war with Iran. This does not prove structural damage to the medical business, but it does show that this segment is more sensitive to shutdowns and lower foot traffic than nursing and special-needs services are to emergency instructions. In the next quarter, the market will need to see not only that nursing remains stable, but also that medical services return to a normal pace after the disruption.

Cash covered the quarter, but dividends already took priority

The cash picture in the quarter is better than in the comparison period, but it still requires a clear distinction between profit, operating cash flow, and cash left after actual uses. Operating cash flow was NIS 39.9 million, compared with NIS 16.7 million in the parallel quarter. The improvement came despite negative timing differences of NIS 35.4 million in assets and liabilities, compared with NIS 45.6 million in the parallel quarter.

For financial flexibility, the relevant frame here is all-in cash flexibility: cash left after the period's actual cash uses, including investments, lease principal repayment, loan repayment, and dividends to minority holders. On that basis, the quarter was almost balanced. It was not a case where net profit fully converted into free cash.

The balance sheet is still comfortable: cash and equivalents of NIS 215.4 million against non-lease loans and credit of about NIS 73.8 million create net cash of about NIS 141.7 million. But lease liabilities totaled about NIS 251.9 million, so the narrow net-cash headline is not the full story. In a company that operates frameworks, branches, and medical centers, leases are part of business cash economics, not a footnote.

The distribution policy is back at the center as well. At quarter-end, the company recorded a NIS 22.5 million dividend payable, and on May 19, 2026, it declared another dividend of about NIS 41.2 million to be paid in June. Together, that is NIS 63.7 million of distributions that the first quarter alone did not fund with free cash after investments, leases, and repayments. That does not make the distribution problematic, because the company has a strong balance sheet and operating cash flow. It does mean that dividends keep making cash a practical question, not only a balance-sheet question.

The first quarter strengthens the view that 2026 is a proof year, not a year of resolution. The company showed that the operating business can keep growing even in a difficult security environment, that HR has not broken as a profit engine, and that special-needs services remain stable. At the same time, it quantified a nursing-tender risk large enough to change the evidence weight: current results are good, but a potential NIS 45 million annual operating-profit hit does not fit a relaxed reading of the quarter.

Two post-balance-sheet events add an execution layer. Oren Levi became CEO on May 3, 2026, just as the company needs to manage the nursing tender, digitization, efficiency work, a return to full medical activity, and possible acquisitions in nursing. At the same time, UMI increased its holding and became a control-block holder after a special tender offer, while some excess shares are held in trust pending Competition Authority approval. That may add a more significant stakeholder around the capital table, but it does not replace the margin and cash-flexibility test.

Danel looks operationally stronger than it looked after the 2025 report, but less risk-free than the net-profit headline suggests. The strongest counter-thesis is that the market may be over-weighting the risk: the company has already said it will work to materially reduce the tender impact, it has net cash, and nursing itself grew in the quarter. For that reading to gain weight, three things need to be visible by the end of 2026: tender terms or a transition period that reduce the operating cost, HR margins that remain above the 2025 level, and operating cash flow that covers leases, investments, and dividends without eroding cash. If one of those breaks, the first quarter will be remembered less as a strong quarter and more as a short window before the tariff test.