Gaon Group in the First Quarter: Strong Cash Flow Meets a Backlog That Still Has to Prove Profitability

Gaon Group delivered in the first quarter what was missing after 2025: real cash flow, lower short-term credit, and a better liquidity position. Still, this does not close the debate on growth quality. Cash flow leaned mainly on lower receivables and higher suppliers, while inventory did not fall and parent-company solo cash remained very small. Backlog climbed to NIS 1.1 billion, but the planning, development, and execution segment, the part that should benefit from that backlog, moved into a small segment loss. The quarter improves the financing read, but does not turn the company into a clean growth story: industry and trade still carry profit, projects still need to prove margin, and the galvanizing-plant dispute adds uncertainty around an industrial asset that could have become a recurring income source. The next proof points are whether cash flow stays positive without another sharp receivables release, whether backlog becomes segment profit, and whether consolidated cash becomes more accessible to public-company shareholders.

The Business Is Infrastructure, but the Engines Are Not Moving Together

Gaon Group is an industrial infrastructure group with three economic layers. Industry manufactures and markets pipes, valves, and taps for water, fuel, and gas transmission infrastructure. Planning, development, and execution works on projects for government entities, municipalities, water corporations, and agricultural corporations. Trade distributes infrastructure, plumbing, fire-safety, electrical, and home products through branches and a national distribution center.

That split matters because the quarter does not tell one uniform story. Consolidated revenue rose 4.4% to NIS 191.0 million, gross profit rose 7.2% to NIS 45.8 million, and net profit rose 6.2% to NIS 12.3 million. But the engine that is supposed to carry the new growth story did not carry the profit. Industry and trade pulled upward, while planning and execution grew revenue but moved into a segment loss.

The unusual number in the table is not the revenue growth, but the gap between volume and profitability. In infrastructure and project businesses, large backlog is a condition for a strong year, but it is not enough. If projects require more labor, guarantees, coordination with authorities, and working capital before they leave profit behind, backlog can expand activity without improving business quality.

A NIS 1.1 Billion Backlog Is Still Not Profit

Backlog at the end of March reached NIS 1.1 billion, compared with NIS 602 million at the end of March 2025. Industrial backlog rose from NIS 449 million to NIS 719 million, and planning, development, and execution backlog jumped from NIS 120 million to NIS 364 million. This continues the tracking point opened in the prior annual analysis: the group had already shown demand and backlog, but still needed to turn backlog into cash and profit.

The first quarter gives only a partial answer. On cash, the answer is positive. On project margin, it is still weak. Planning and execution increased revenue to NIS 24.6 million, but posted a NIS 0.7 million segment loss, compared with a NIS 1.0 million segment profit in the parallel quarter. This activity is not the same as selling an industrial product from an existing plant. It depends on execution, timing, subcontractors, approvals, and collection without stretching the balance sheet.

The additional win in Ramat Gan sharpens the same gap. The new pneumatic waste-collection project is expected to total about NIS 62 million: about NIS 18 million for planning and construction, about NIS 30 million for building connections, and about NIS 14 million for operation and maintenance over up to 15 years. This strengthens business visibility, but it also splits the consideration across stages and years. The economic value will be tested by progress pace, margin, collection, and working capital, not by the award itself.

Cash Flow Improved, but Part of It Came From Working-Capital Timing

The strongest figure in the quarter is operating cash flow: NIS 59.8 million, compared with NIS 3.6 million in the parallel quarter. That allowed the group to repay NIS 24.9 million of short-term credit, NIS 4.4 million of long-term loans, and NIS 2.9 million of lease principal, while still increasing cash by NIS 22.5 million.

All-in cash flexibility after the quarter's actual cash uses looks like this: operating cash flow of NIS 59.8 million, less reported CAPEX of NIS 4.0 million, less NIS 2.9 million of lease-principal repayment, less NIS 4.4 million of long-term loan repayment, and less NIS 24.9 million of short-term credit repayment. After all of those uses, about NIS 23.7 million remained before FX effects. This is an all-in cash flexibility frame, meaning cash left after actual period uses, not a normalized long-term cash-generation calculation.

Still, cash-flow quality needs caution. The working-capital improvement came mainly from a NIS 20.3 million decline in receivables and a NIS 17.8 million increase in suppliers, while inventory increased by about NIS 2.1 million. The receivables decline is also tied to sales timing and lower March sales following Operation Lion's Roar, so it should not all be read as structurally stronger collection. This quarter proves that the balance sheet can breathe. It does not yet prove that backlog has become a stable cash source.

Liquidity also improved. Cash and cash equivalents rose to NIS 77.2 million, and a NIS 20 million bank-pledged deposit became a short-term investment after release from pledge. Working capital rose to NIS 168.1 million, the current ratio to 1.37, and the quick ratio to 0.75. On the other hand, parent-company cash remained only NIS 2.8 million and solo operating cash flow was negative NIS 0.6 million. That continues the tracking point from the cash-access analysis: consolidated cash must be separated from cash truly accessible at the public-company layer.

Operation Lion's Roar and the Galvanizing Plant

The first event is the operating environment. Some plants are essential facilities and kept operating during Operation Lion's Roar, but sales and execution projects were hurt by movement restrictions in work areas. Freight costs and oil tariffs also pushed raw-material prices higher, especially in plastics. The quarter therefore includes both working-capital release and real disruption to some sales and projects.

The second event is the galvanizing plant. The customer memorandum included minimum monthly galvanizing volumes of 1,200 tons, a raw-material-linked price list, and an option to lease most of the operating area and equipment at the Acre plant for about 7.5 years, with base monthly rent of NIS 500 thousand plus VAT. At the end of March 2026, Tzinorot Galvanizing canceled the memorandum due to the customer's non-compliance. After the balance-sheet date, on May 11, 2026, the customer filed a claim seeking enforcement of the lease option, or alternatively monetary relief stated for fee purposes at about NIS 53.4 million.

The point is not only legal. The galvanizing plant could have moved from part of the industrial activity into a recurring service and lease-income generator. That possibility has now become uncertainty: if the cancellation stands, the company needs to show the economic alternative for the plant. If the proceeding moves against Tzinorot Galvanizing, another risk layer will sit on an asset that was supposed to reduce operating complexity.

Conclusions

The first quarter improves Gaon Group's position, but it does not close all of the questions opened after 2025. Operating cash flow jumped, short-term credit declined, a NIS 20 million deposit was released from pledge, and backlog is large enough to provide visibility. The problem is that planning, development, and execution still does not show profitability that justifies the backlog jump, and consolidated cash is still not the same as cash accessible at the public-company layer.

The current read leans cautiously better: the group moved from a quarter in which the question was whether profit would become cash to a quarter in which some of that cash has arrived. For that improvement to gain more weight, two things need to happen over the next 2-4 quarters. The project segment needs to move from a segment loss to reasonable profitability, and cash flow needs to remain positive without an unusual decline in receivables or convenient supplier support. The negative read would be a combination of growing backlog, weak project margins, renewed growth in short-term credit, and a deepening dispute around the galvanizing plant. This is not a full turning-point quarter, but it does bring the debate back to the right place: less "is there backlog" and more whether that backlog can earn, be collected, and reach shareholders.