Electra in the First Quarter: Israel Still Has Not Restored Margin, and Debt Funds the Bridge Year

Electra opened 2026 with higher revenue, but the first quarter still does not close the two questions left open after 2025: whether Israeli projects can return to reasonable profitability, and whether growth can turn into cash without relying on more debt. Revenue rose to NIS 3.85 billion, up 14%, but operating profit rose only to NIS 111 million and profit attributable to shareholders fell to NIS 44 million. The sharpest evidence sits in Israel: NIS 2.02 billion of segment revenue, but only NIS 7 million of operating profit. Operating cash flow after land purchases was negative NIS 225 million, and the decline in cash was contained mainly by NIS 367 million of net financing inflow. Service and concessions still carry a large share of profit, and the company can still raise debt at an A+ stable rating, but this quarter is not proof of a turnaround. For the read to improve over the coming quarters, Israel needs to stop working at almost no margin, suppliers and customers need to stop consuming cash, and the U.S. and logistics acquisitions need to add profit rather than only future cash commitments.

Israel Still Has Not Restored Margin

Electra is an infrastructure, services and concessions group that generates most of its revenue from projects, but its earnings quality has to be read through several layers: Israeli projects, overseas projects, service and maintenance, development real estate and concessions. The first quarter again exposes that split. The company sold more, mainly in Israel and in services, but profit did not rise at the same pace because the Israeli business still leaves almost no operating profit.

Revenue in Israeli building and infrastructure projects rose 24% to NIS 2.02 billion, representing about 51% of group revenue. Yet the segment's operating profit fell from NIS 12 million to NIS 7 million. That is an operating margin of roughly 0.3% on segment revenue. Part of the revenue increase came from the first-time consolidation of Ter-Arma, acquired at the end of the third quarter of 2025, which contributed about NIS 70 million to segment revenue. Even after that added activity and higher execution volume, Israel still does not show an economic repair.

The issue is not the small drop from NIS 12 million to NIS 7 million by itself. A number that small can move between quarters. The issue is that Israeli revenue grew by NIS 385 million versus the comparable quarter and operating profit still declined. The internal explanation points to weaker profitability in main infrastructure contracting and electromechanical systems installation. Those are exactly the areas that needed to start proving whether the old project book is being cleaned up and whether new projects are entering on better economics.

Service and maintenance remain the earnings anchor: NIS 876 million of revenue and NIS 70 million of operating profit, almost 60% of segment profit. But even there, profit rose only 4% while revenue rose 13%. Concessions look better on profit, with NIS 16 million of operating profit versus NIS 11 million, despite lower revenue in Electra Afikim's public transport activity due to the effects of Operation Lion's Roar. The quarter is not broadly weak. It shows that group profit still relies on service, concessions and overseas activity while the largest revenue contributor has not yet returned to a margin that matches its scale.

Backlog and Cash Show Why This Is a Bridge Year

The question left open in the 2025 annual analysis was not resolved in the first quarter. The company's problem was never a lack of work. Total backlog remains very high at NIS 39.37 billion, down only about 1% from the end of 2025. Israeli backlog excluding associates stands at NIS 24.58 billion, and NIS 5.87 billion of that is scheduled for execution in 2026. That makes the coming quarters more important than the backlog number itself. If almost a quarter of the Israeli backlog is supposed to flow through the income statement this year, the question is how much profit remains from it.

There is one small positive signal in new contract quality. In January, Electra Construction was awarded the Optoshu-Livvik Tel Aviv project, with expected consideration of about NIS 400 million excluding VAT, linked to the construction input index. That is not enough to prove a systemic change in Israeli contract economics, but it is exactly the kind of detail the market should watch from here: less focus on project size, more on indexation terms, risk allocation and the pace at which profit is recognized.

Cash flow reinforces the same conclusion. Operating cash flow after land purchases was negative NIS 225 million, better than negative NIS 398 million in the comparable quarter, but the improvement came almost entirely because land purchases fell from NIS 238 million to only NIS 2 million. Before land purchases, operating cash flow was negative NIS 223 million, weaker than negative NIS 160 million in the comparable quarter.

Two cash frameworks need to be separated. Normalized cash generation from the existing business is hard to measure in a single quarter, especially in a project group. All-in cash flexibility after the quarter's actual cash uses is visible: after operating cash, investments, acquisitions, leases, repayments, buybacks, dividends and net financing movements, cash fell by only NIS 35 million. That limited decline did not come from operating surplus. It came from positive net financing.

The more important detail is working capital. Customers consumed NIS 285 million of cash, while payables to suppliers and service providers fell by NIS 333 million. In 2025, the rise in suppliers was one of the layers supporting cash flow. In the first quarter, the direction reversed: suppliers were no longer financing the activity, and the company paid down part of the operating credit that had built up. Lower contract assets, inventory and land inventory helped in the other direction. The net result was still negative.

Funding Is Open, but New Events Raise the Proof Bar

On one side, Electra still has access to the debt market. In January it issued an additional NIS 400 million par value of Series F bonds for gross proceeds of about NIS 350 million, at an effective fixed annual rate of about 4.83%. In March, S&P Maalot affirmed the company and its bonds at A+ stable and short-term A-1. At quarter-end the company also complied with its bond covenants, and the reported ratios show net financial debt to balance sheet of 26.4% for Series F and 29.5% for Series D and E.

On the other side, financing is already taking more space in the income statement. Net financing expenses rose to NIS 30 million, compared with NIS 19 million in the comparable quarter. That almost wipes out the operating improvement for shareholders: operating profit rose by only NIS 4 million, while net financing expenses rose by NIS 11 million. Profit attributable to shareholders therefore fell from NIS 56 million to NIS 44 million, even as revenue grew.

The balance sheet tells the same story from another angle. Non-current liabilities rose by NIS 453 million from the end of 2025, mainly due to a NIS 220 million increase in bonds, a NIS 106 million increase in loans to finance the concessions segment for bus purchases, and a NIS 74 million increase in lease liabilities following a new office lease. This is not an immediate liquidity problem, and the company says no warning signs exist. But it does mean that the current year relies on available debt while the business still has to prove better margin and cash conversion.

After the balance sheet date, the company continued to expand. In February, the U.S. subsidiary completed the purchase of an additional 49% of Hellman Electric for about $15 million, bringing its ownership to 100%. In April, it purchased another 49% of Gilston Electrical for about $31 million, subject to adjustments for future project profitability and working capital changes, with payment during 2026-2028. Electra FM also agreed in April to buy 51% of A.R.D. Logistics, which operates in warehouse management, transport and distribution services, for about NIS 71 million, with call and put options to acquire the remaining shares based on an earnings multiple. These moves can strengthen service and the U.S. platform, but they also add execution burden and future payments.

The more negative event came from concessions. On May 4, Generation Capital filed a claim against the company for about NIS 273 million in connection with a 2022 sale transaction, in which Generation bought 25.5% of the concessionaire in the Gilboa pumped-storage project from the company. The company rejects the claims and is considering a counterclaim. This does not prove a near-term accounting loss, but it does show that the concessions layer is not only a source of value, disposals and long backlog. It is also a layer of long contracts, partners, contractors and disputes that can resurface years after a transaction. The claim amount equals about 12% of quarter-end equity.

Currency moves after the balance sheet date add another layer of volatility for the second quarter. By May 23, the U.S. dollar had weakened by 8.15% against the shekel and the euro by 7.06%, while the ruble strengthened by 4.86%. Part of the company's revenue is in foreign currencies, and the company expects the exchange-rate moves to affect results, the balance sheet and equity. That is not enough to build a numerical Q2 forecast, but it is another reason not to treat the first quarter as a clean run rate.

Conclusion

The first quarter of 2026 does not change Electra's story. It sharpens it. The group remains large, diversified and able to access funding, and service, concessions and the U.S. platform provide an important earnings layer. But Israel has not returned to a reasonable margin, and cash flow still does not prove that the large backlog is turning into cash before debt enters the picture.

The current read is that Electra is in a bridge year with acceptable group-level operating resilience, but not enough evidence yet of a quality improvement in the two places the market should care about most: Israeli projects and cash flow after working capital and investments. The counter-thesis is credible: more indexed new contracts, compensation on old projects and growth in service and concessions can turn the first quarter into only a conservative starting point. Until then, Q2 and Q3 need to show Israeli operating profit materially above NIS 7 million, more stable supplier and customer movement, and financing costs that do not keep absorbing most of the operating improvement.