Lesico in the First Quarter: High Backlog Meets Negative Cash Flow and Slower Execution

The first quarter does not break Lesico's end 2025 thesis, but it moves it back to a less comfortable proof stage: the backlog is there, the new projects are there, and the construction segment even improved its gross margin, but the improvement has not yet reached cash. Revenue fell 24.3% to NIS 184.6 million, the operating loss deepened to NIS 7.5 million, and operating cash flow was negative by NIS 73.9 million. This was not just a weak profit quarter. Cash fell by NIS 49.9 million, mainly because the company paid suppliers and other payables faster than backlog and customers released cash back into the business. On the other hand, a backlog of about NIS 1.619 billion, a roughly NIS 95 million win in Emek Hefer, and a roughly EUR 15 million win in Belgium still leave a real recovery base if execution normalizes. This quarter is therefore a compressed bridge year inside three months: less evidence of profit recovery, more evidence that the next few quarters have to be read through cash, collection, and project progress.

Company Setup

Lesico is an infrastructure execution company, not an asset company. Its economics are driven by winning projects, executing them at the right pace, protecting gross margin, and managing working capital tightly between customers, subcontractors, and suppliers. A large backlog is a useful starting point, but it is not enough: value is created only when work becomes revenue, gross profit, and cash collection.

The core business remains the construction projects segment. In the first quarter, it generated NIS 161.5 million of revenue out of the group’s NIS 184.6 million total, about 87.5% of the top line. The maintenance and concessions segment is smaller, but this quarter shows that it can still affect result quality when activity in the US or abroad does not run at the right pace.

The sector lens matters. For an execution contractor, a temporary drop in project pace is not unusual by itself, and a high backlog is not an edge by itself. What matters this quarter is the gap between two things that should eventually work together: backlog and new project wins improve visibility, while cash flow and working capital show that economic conversion is still not stable.

Construction Margin Improved, but the Cost Base Is Heavier

The simple headline would be a 24.3% revenue drop and a NIS 7.4 million net loss. The more useful reading is less one sided. Group gross profit fell only 13.7% to NIS 9.5 million, and gross margin rose to 5.2% from 4.5% in the comparable quarter. In the construction segment, the picture was better: gross profit rose to NIS 9.7 million, and the margin rose to 6.0% from 4.3%.

That improvement did not travel far enough down the income statement. Selling, general and administrative expenses rose 23.7% to NIS 17.1 million, partly because of a thicker management team and the move to new offices. When revenue falls and headquarters costs rise, even better construction margins are not enough to hold the operating line. The operating loss therefore deepened to NIS 7.5 million, and EBITDA moved to a NIS 3.6 million loss from a NIS 0.8 million profit in the comparable quarter.

Financing is also now more visible. Net finance expenses rose to NIS 2.8 million, mainly because of bond interest, bank interest and fees, lease financing costs, and fair-value remeasurement of put options held by non-controlling interests. A NIS 3.3 million tax benefit softened part of the loss, partly because of a merger of a sub-subsidiary into a subsidiary and the period’s losses, but it is not a substitute for operating profit.

For investors, the quarter does not prove that the 2025 profit base is broken, but it also does not confirm that the strong fourth quarter became a new run rate. In the prior annual analysis, the checkpoint was whether backlog and profit would turn into cash without renewed working-capital pressure. The first quarter did not close that question. It sharpened it.

Backlog Is High, but Projects Still Consume Cash

The group’s backlog stands at about NIS 1.619 billion. That is a significant number relative to quarterly revenue, and it prevents a simplistic read that the revenue decline necessarily reflects market-share loss. But backlog for an infrastructure contractor is a commitment to future execution, not cash and not profit. The company itself highlights that revenue recognition timing and continued execution depend, among other things, on schedules, budget availability, and customers’ ability to change or stop projects.

Two new wins support the positive side of the story. The first is a project to build a switching station in Emek Hefer, with expected revenue of about NIS 95 million under a measurement-based contract, an estimated execution period of about 20 months, and a work-start order from March 1, 2026. The second is a win by an 87.5%-held subsidiary in Belgium, financed by the European Union, for ongoing contracting services to an existing customer in the semiconductor industry. The expected scope is about EUR 15 million, roughly NIS 56 million, over about three years, and the project began in March 2026.

These are not empty announcements. Emek Hefer has already started, and Belgium is tied to an existing customer and process-piping activity that fits the group’s core capabilities. Still, both projects highlight the problem rather than solve it: revenue comes through milestones and periodic orders, so the real test is execution pace, project margin, and collection, not just the win size.

Ghana also remains unresolved. The current quarter does not provide an update that closes the collection and financing issue raised in the prior Ghana analysis. For the main article, that means Ghana should not become the center of the story again without new disclosure. For follow-up monitoring, any material collection or clearer financing route can still change Lesico's cash-quality read quickly.

Cash Flow Shows the Quarter Consumed Real Liquidity

The key number this quarter is not the net loss alone. Operating cash flow was negative by NIS 73.9 million, compared with negative NIS 53.3 million in the comparable quarter. The loss contributed to that result, but most of the story sits in working capital: after profit-and-loss adjustments, changes in assets and liabilities reduced cash flow by NIS 67.4 million.

This is where positive working capital can mislead. Operating working capital rose to NIS 109.6 million from NIS 42.7 million at the end of 2025, but for an execution company that is not always a sign of strength. When suppliers and payables fall faster than customers and contract assets release cash, more cash is trapped inside the work cycle. In this quarter, customers and contract assets actually fell by NIS 6.6 million, but other receivables increased by NIS 18.7 million, suppliers and service providers fell by NIS 32.7 million, and other payables fell by NIS 21.0 million. The balance sheet looks less crowded with current liabilities, but the cash balance paid the price.

All-in cash flexibility, meaning cash after operating activity, CAPEX, leases, financing payments, dividends, repayments, and other real uses, still does not look like organic surplus. Cash fell from NIS 147.9 million to NIS 98.1 million, the trading securities portfolio fell from NIS 63.8 million to NIS 58.4 million, and current bank credit rose from NIS 15.1 million to NIS 43.9 million. Investing activity added a net NIS 1.5 million mainly through securities sales, and financing activity added NIS 23.2 million mainly through short-term credit, not through profit retained in the company.

There is no covenant crisis here. Consolidated equity was NIS 225.4 million versus a bond covenant threshold of NIS 120 million, and the equity-to-balance-sheet ratio was 42.9% versus a 22% threshold. The company also meets its bank covenants, with tangible equity of NIS 170.5 million and a tangible equity-to-balance-sheet ratio of 24.0% versus a 17% requirement. The question, therefore, is not whether the balance sheet breaks now. It is how many quarters of negative cash flow Lesico can absorb before the bond and bank lines become a dependency rather than a liquidity cushion.

Management Is Testing a Portfolio Shift, Not Just Another Project

Post-balance-sheet events point to a deeper discussion than one weak quarter. On April 10, 2026, Lesico signed a non-binding memorandum of understanding to sell all of its holdings in Lesico US, Inc., a US maintenance and road-marking business. The net consideration is expected to reflect a value materially above the value reflected in the consolidated financial statements, but no amount is disclosed, there is no binding agreement, and there is no certainty the transaction will be completed.

That memorandum matters precisely because the maintenance segment was weak this quarter. If the transaction closes on good terms, it could release value from an asset that did not support quarterly profitability and reduce exposure to an activity that weighed on the segment. If it does not close, investors are left with the same business that moved into a gross loss in the first quarter.

At the same time, on April 15, 2026, the company signed a preliminary, non-binding memorandum of understanding to acquire 100% of an Israeli private company active in industrial air conditioning and energy efficiency, for total consideration of about NIS 50 million, part of it deferred. Such a deal could add an adjacent activity in infrastructure and systems, but it could also consume capital and management attention while the existing business still has to prove cash generation.

The shelf prospectus published on May 26, 2026 adds possible capital flexibility, but it is not new financing by itself. The next few quarters are therefore not only about whether Lesico wins more work. They are about whether management can replace a weaker activity with a higher-quality one without burdening the cash balance after a quarter of heavy cash use.

Conclusion

The first quarter moves Lesico from a comfortable backlog-and-liquidity read to a more demanding execution, collection, and capital-allocation read. The positive side is clear: construction gross margin improved despite lower revenue, the backlog is large, and two new projects provide visibility for the coming years. The problem is just as clear: slower activity, a heavier fixed cost base, a gross loss in the maintenance segment, and severe cash consumption do not allow investors to treat the fourth quarter of 2025 as a new base.

The current conclusion is that 2026 remains a proof year, but the proof has moved from reported profit to cash. The positive thesis strengthens if the next quarters show a recovery in revenue pace, sustained construction margins, lower working-capital pressure, and a binding transaction that either unlocks value in the US or adds profitable activity in Israel without hurting liquidity. It weakens if the backlog remains a large number while cash keeps falling and short-term credit funds the gap. Short interest does not carry the story, with short interest at about 0.01% of float, so the market’s interpretation is likely to focus less on technical pressure and more on whether this quarter was a temporary disruption or the beginning of weaker cash conversion quality.