Shmuel Baruch in the first quarter: Kadma North has to prove profit can turn into cash
Shmuel Baruch opened 2026 with a sharp drop in profit and negative operating cash flow, but the real test is whether Kadma North releases about NIS 23 million of surplus cash. The quarter shows project progress, yet the expansion into new land still relies on debt and credit lines.
The first quarter does not fully answer the question left open after Shmuel Baruch's 2025 annual report, but it makes the next proof point much closer: whether Kadma North, now completed and fully sold, will actually release roughly NIS 23 million of surplus cash to the company soon. The headline profit numbers are weaker, with revenue down about 10% and gross profit down much more sharply, but that is not the central issue. The central issue is that the business is still consuming cash while it advances existing projects and buys new land, so the quarter was again funded by debt rather than by operating cash flow. There is real operating progress too: Kadma North was completed, Migdal HaEmek sold 15 units during the quarter, Elikhin and Ofakim moved another permitting step forward, and the company now has a larger project pipeline. Still, as long as the surplus sits inside project-loan accounts, bond collateral and early-stage projects, the value is not fully accessible at the corporate level. The next report needs to show less project promise and more cash actually moving above the project-finance layer.
The business is a working-capital machine, not just a homebuilder
Shmuel Baruch develops residential and commercial projects in Israel, using in-house construction capability and operating through subsidiaries, project companies and partners. That sounds like a standard real-estate description, but its financial statements are driven by working capital. The company buys land, funds planning and construction, sells apartments, recognizes revenue by construction progress, and then waits for project surplus to be released from the lender-controlled accounts. The gap between accounting revenue and cash is not a footnote. It is how the business works.
This is also not a regular listed residential developer with active equity trading. The company became a reporting issuer through its Series A bonds, so the useful investor screen is not an equity multiple or a public-market discount. It is debt coverage quality, the speed of surplus release, and the company's ability to fund new projects without adding more and more debt before older projects return cash.
The continuity with the prior annual coverage is direct. In the 2025 annual analysis, the open issue was that the project backlog was expanding faster than cash. The first quarter did not reverse that picture. It sharpened it: one project, Kadma North, should soon become a cash-surplus event, while the company is already committing capital to new, longer-cycle projects.
Profit fell, but cash is the real test
First-quarter revenue was NIS 82.0 million, compared with NIS 91.3 million in the comparable quarter, down about 10%. Gross profit fell to NIS 10.8 million from NIS 18.7 million, and the gross margin dropped from about 20.5% to about 13.2%. Net profit was only NIS 3.6 million, compared with NIS 9.3 million a year earlier.
That decline is not random. Kadma South, one of the projects that supported revenue recognition, is now completed, while many of the projects meant to support the coming years are still in construction, permitting, marketing or planning. So this is not only a weaker profit quarter. It is a transition quarter between maturing projects and projects that are beginning to require capital.
The all-in cash picture is sharper than the income statement. This is not a normalized view of cash generation from the existing business, but a view after the period's actual cash uses and financing. Operating cash flow was negative NIS 55.0 million in the first quarter, versus negative NIS 13.5 million in the comparable quarter. Before movement in real-estate inventory and buildings under construction, the business consumed only NIS 2.7 million, but inventory took another NIS 52.3 million. That is the practical meaning of a growing developer: income can appear in the accounts while land and construction absorb cash before the surplus returns.
The chart explains the quarter better than net profit. The company did not close the quarter through strong operating cash generation. It closed it through financing: new bank and institutional loans after repayments, alongside NIS 6.5 million of cash interest paid. The quarter therefore does not strengthen the profitability story. It highlights the funding test.
Kadma North is the nearest cash proof point
The liquidity disclosure is the key finding. At the end of March, the company had a raw current deficit of NIS 43.9 million, while the adjusted deficit for the warning-sign test was NIS 3.5 million. The board does not view this as a liquidity problem, and the reason is three layers: at the report publication date the company had about NIS 10.5 million of cash, about NIS 11.5 million of unused credit lines available for immediate drawdown, and an expected surplus draw of about NIS 23 million from Kadma North.
That is not a large number relative to the balance sheet, but it is very large for the credibility of this quarter. Kadma North is completed, 100% sold, and the project table shows no remaining cost to complete. If the surplus actually reaches the company, it will close part of the cash gap created in the quarter and support the view that negative cash flow is mainly timing. If the draw is delayed, offset or weaker than expected, the opposite reading gets stronger: the company has projects that look attractive in the tables, but cash is still delayed inside the project-finance and collateral structure.
This matters especially because of the Series A bonds. The company's rights to surplus from Kadma North, Kadma South and Rehavia are pledged to bondholders. The company is compliant with its financial covenants, with equity of about NIS 88.4 million, an equity-to-balance ratio of 15.4% against a minimum threshold of 6.8%, and a debt-to-collateral ratio of 61% against a 77% ceiling. There is no immediate covenant stress. But the equity-to-balance ratio is still below the 17% threshold required for distributions, so even if Kadma North releases the expected cash, the first result is better liquidity and coverage. It does not yet make the company a shareholder cash-return story.
New growth buys years of work and funding
The quarter also brought real business progress. Elikhin received full building permits for 4 of 7 lots, and construction began in April 2026. Ofakim received a full building permit for one of two compounds, and the company expects construction to start in May 2026. Migdal HaEmek signed 15 contracts in the quarter and 3 more after the balance-sheet date, lifting its marketing rate to 77%. These are not empty announcements. They are progress markers in projects that need to replace Kadma over 2026 and 2027.
The cost of that progress is visible on the balance sheet. Non-current land inventory rose from NIS 69.8 million at the end of 2025 to NIS 140.0 million at the end of March, mainly due to Kiryat Ata and Kadima Tzoran. At the same time, bank and institutional credit and loans rose to NIS 332.1 million, compared with NIS 260.6 million at the end of 2025, while Series A bonds stood at NIS 80.5 million. Financial debt grew faster than equity, which rose only through the quarterly profit to NIS 88.4 million.
| Project | What moved in the quarter or by report approval | Economic read |
|---|---|---|
| Kadma North | Construction completed, 100% sold, and an expected surplus draw of about NIS 23 million | The nearest proof that project surplus can become corporate liquidity |
| Migdal HaEmek | Marketing rate rose to 77%, with 15 contracts in the quarter and 3 afterward | Demand is working, but execution still runs through April 2027 |
| Elikhin and Ofakim | Initial or partial building permits were received, with construction expected to start in 2026 | The future pipeline is advancing, but most of the cash cost is still ahead |
| Kadima Tzoran | Land acquisition was completed and funded with a NIS 63 million loan | Growth adds an asset, but also adds debt before a meaningful sales phase |
The table shows why marketing rates are not enough. In a mature project like Kadma North, a 100% sales rate should almost speak the language of cash. In the new projects, even a permit or a land acquisition is only the start of the route. They improve the backlog, but they also move the company into several more years of land, construction, interest and marketing funding before profit turns into surplus.
Conclusion
The first quarter supports a mixed but clear conclusion: Shmuel Baruch is advancing its projects, but it has not yet proven that its growth funds itself. The gross-profit decline is less important than the combination of negative operating cash flow, rising debt and an expected surplus draw that must materialize quickly to keep the thesis credible. Kadma North is a good test because it is mature, sold and completed. If cash is delayed even there, it will be hard to argue that the issue is only timing.
The rest of 2026 has to be a cash proof year. The Kadma North surplus release, sales momentum at Migdal HaEmek and Elikhin, permitting progress at Ofakim, and the ability to fund Kadima Tzoran without repeating the first quarter's pace of debt growth will determine how the company should be read. The positive case is that part of the negative cash flow is investment ahead of surplus release. The counter-case is that the pipeline is growing faster than the company's ability to turn it into free corporate cash, so each new project improves future revenue visibility while keeping the balance sheet under financing pressure.
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