Ciment's Covenant Deferral Shows the Cost Behind Building-Materials Profit

The first quarter at Israel Shipyards does not undermine the view that building materials can still earn money. It does show how costly it is to protect that profit when local construction activity weakens, receivables return to the balance sheet, and the banks have to defer Ciment's covenant test until December 2026. Building-materials revenue declined, but segment profit before depreciation, finance and tax rose slightly, helped by a higher average cement selling price, shekel appreciation and an accounting effect from renewing a cement-vessel lease. The problem is that this profit did not arrive with matching cash support: group receivables rose by NIS 96.2 million from year-end, after no customer receivables were derecognized in the quarter compared with roughly NIS 141 million derecognized at the end of 2025. Added to that is Ciment's funding layer, where the company failed a covenant based on operating profit before depreciation over the last four rolling quarters, with roughly NIS 67 million of loans tied to the breach. The current read is narrow but clear: building-materials profit looks more resilient than revenue, but its funding quality weakened, and the next proof point is actual collection and renewed covenant compliance in December.

Profit Was Protected by Price, Currency and Accounting

On a quick read, building materials delivered exactly what investors wanted to see in the first quarter: lower activity, but not lower profit. Segment revenue was NIS 221.0 million, down 15.7% from NIS 262.1 million in the comparable quarter. Even so, segment profit before depreciation, finance and tax rose to NIS 23.1 million from NIS 22.2 million, and the margin rose from 8% to 10%.

The company attributes the margin improvement to a higher average cement selling price, shekel appreciation whose impact was partly reduced by hedging transactions, and an accounting effect from renewing a cement-vessel lease. These are not signs of a broken activity. The revenue pressure also has a clear operating explanation: lower cement volumes during Operation Rising Lion, partly because activity at construction sites in Israel was reduced, while the decline in cement imports moderated after the reporting period in April 2026.

Still, this quarter does not prove a clean recovery. Part of the profit improvement came from factors that can be temporary or accounting-driven, and part of it was needed to offset a weaker market, higher raw-material costs and cement-vessel shipping costs. Segment profit alone is therefore not enough. The real test is who financed the move from profit to cash.

Receivables Returned After Year-End Factoring Disappeared

The cash frame here is not all-in cash flexibility after investments, dividends, leases and debt repayments. It is a narrower working-capital test: whether building-materials profit stayed in the business as cash or moved back into receivables until collection arrives.

The first-quarter answer is less comfortable than the segment line. Group receivables rose to NIS 328.5 million, up NIS 96.2 million from year-end 2025. The direct explanation is the end of receivables factoring transactions in the building-materials segment that were carried out in the final quarter of 2025 for about NIS 141 million. The same point appears in the period and subsequent-events note from the accounting angle: as of March 31, 2026, no customer receivables were derecognized under factoring agreements, compared with about NIS 141 million at the end of 2025.

That does not mean the receivables are impaired or that the cash will not be collected. It does mean the December 2025 balance sheet showed building materials after a meaningful use of customer-financing tools, and the first quarter brought a large part of that exposure back onto the balance sheet. At the same time, operating cash flow was a use of NIS 0.5 million, compared with positive operating cash flow of NIS 105.6 million in the comparable quarter. Within that cash flow, receivables rose by NIS 92.2 million and other receivables rose by NIS 34.2 million, only partly offset by suppliers, construction-contract liabilities and high depreciation.

This is the real cost behind the building-materials profit. The segment protected profitability, but the group again had to carry more customer credit on the balance sheet, while also relying on positive financing cash flow of NIS 88.8 million, mainly through NIS 120.8 million of net short-term credit. Part of that financing belongs to other segments, but building-materials working-capital financing was also part of the period's funding needs.

December 2026 Became Ciment's Proof Date

In importing, producing and marketing building materials, customer credit and working-capital swings are not unusual by themselves. What makes this quarter more important is the combination: segment profit held up, receivables returned to the balance sheet, and the banks had to defer Ciment's covenant test.

Ciment did not meet the financial covenant requiring operating profit before depreciation, measured over the last four rolling quarters for Ciment and a related company, to be at least NIS 25 million at the end of each quarter. The long-term loans for which the covenant was breached amounted to about NIS 67 million. During the reporting period, the banks approved a deferral so that the covenant would not apply on March 31, 2026 and would come back into force only in December 2026. The company expects to comply with the covenant on December 31, 2026 and again on March 31, 2027.

That deferral matters because it prevents a weaker quarter in construction markets from becoming an immediate financing event. But it does not erase the signal. If building-materials profitability were suffering only from a temporary volume distortion, the covenant would not need to be a central checkpoint. The fact that Ciment received time until December means the banks are giving the company room to repair, while also turning the next four quarters into a very concrete operating test: more operating profit before depreciation, more collection, and less need for factoring tools to tidy up the period-end balance sheet.

Profit Passed, Collection Still Has to Prove Itself

The implication is not that building materials lost its earning power. On the contrary, the quarter showed that the segment could protect profit even when revenue declined. But that protection came with a clearer funding cost: higher receivables, operating cash flow that did not support profit in the quarter, and a covenant Ciment will have to meet again at the end of 2026. The read improves if receivables decline in the coming quarters without a return to similar-scale factoring, operating cash flow turns positive, and Ciment produces enough operating profit before depreciation to make the covenant deferral temporary. If that does not happen, building-materials profit will remain real on the income statement, but it will carry a higher price on the balance sheet and in the relationship with the banks.