Av-Gad in the First Quarter: Gross Profit Returned Before Projects Released Cash

Av-Gad shows in the first quarter of 2026 the progress that was missing in 2025: revenue increased, gross profit turned positive, and operating profit no longer depended on the Kinneret City revaluation. That matters because the core problem in the previous annual analysis was that backlog was growing faster than cash and core operating profit. This quarter moves the company one step forward operationally, with revenue of NIS 64.5 million and gross profit of NIS 8.1 million. The same quarter widened the gap between revenue recognition and customer cash collection: contract assets rose to NIS 125.4 million, while customer advances fell to NIS 18.7 million. Economically, the income statement looks better, but cash is not yet being released at a pace that comfortably supports the funding structure. The next proof points are straightforward: whether the eight projects marked for the coming year move into launch and financing, whether post-balance-sheet sales become collections, and whether project surplus is released before financing costs keep absorbing the operating improvement.

Core Activity Is Starting To Carry The Report

Av-Gad is an urban renewal developer trying to turn backlog into execution, sales, surplus cash and accessible value. Its economics sit on three stages: signatures and planning, permits and project financing, then construction and sales that generate gross profit and surplus cash. A large backlog is only the starting point. Value reaches shareholders only when that backlog passes through equity capital, bank financing, construction pace and buyer payments.

The first quarter finally showed a meaningful repair point. Revenue was NIS 64.5 million, up about 59% from NIS 40.5 million in the comparable quarter. Gross profit reached NIS 8.1 million, compared with a small gross loss of NIS 153 thousand in the comparable quarter, implying a gross margin of about 12.6%. Operating profit was NIS 3.1 million. The comparable quarter showed operating profit of NIS 12.1 million, but that included a NIS 16.4 million gain from recognizing investment property in Kinneret City. Without that revaluation, the core operating comparison base was far weaker.

The gap between operating profit and net loss is the financing layer. Net finance expenses rose to NIS 7.1 million, almost double the comparable quarter, mainly due to the expansion of Series C bonds, higher project credit and the issuance of Series D bonds. This creates a quarter in which the business itself looks better, while the result attributable to shareholders is still negative. That is the transition the company needs to prove in 2026: not only that more projects are active, but that they can finance themselves fast enough so gross profit is not swallowed by the cost of capital.

Kinneret City remains a separate caution point. Investment property stayed on the books at NIS 17.1 million, and the May 20, 2026 appraiser letter says there was no material value change as of March 31, 2026 versus the September 30, 2025 appraisal. That preserves the accounting number, but it does not resolve the dispute. The quarterly note again refers to the owners' February 1, 2026 cancellation claim around a NIS 60 million loan and NIS 4.14 million of interest, while the company rejects those claims. Kinneret City is not the positive edge of the quarter. The edge is that core activity is beginning to show gross profit without that contribution.

Backlog Is Growing While Collections Lag Revenue Recognition

The company raised the 2026 execution bar: over the coming year it expects construction to begin on eight projects, including 1,541 units to be built and 1,120 units for sale. As of the report date, total project backlog was about 33,554 units, including 500 units planned under Kinneret City. A number like that attracts attention, but the company itself marks the portion that is still not mature: about 17,659 units are at a stage where the start date, revenue, costs, units for sale and profitability cannot yet be reliably estimated.

The sales data adds another layer. During the quarter, the company signed 10 binding sale contracts across 7 projects, totaling NIS 32.7 million. After the balance sheet date and close to publication, it signed another 21 contracts across 3 projects totaling NIS 61.8 million, alongside 38 purchase requests totaling NIS 126.4 million. That suggests demand did not stop at the end of March. It still does not equal cash collection or prove that sale terms improved.

The decisive quality-of-growth item is the gap between contract assets and customer advances. Contract assets rose from NIS 104.7 million at the end of 2025 to NIS 125.4 million at the end of March 2026. Customer advances and contract liabilities fell over the same period from NIS 21.4 million to NIS 18.7 million. The net gap between revenue recognition and advances increased from about NIS 83.3 million to about NIS 106.7 million in one quarter.

This does not mean sales are weak. It means growth is still consuming capital before it returns cash. Higher revenue and gross profit can look like sharp improvement while the balance sheet says the company is still financing the gap between execution, accounting recognition and buyer payments. For an urban renewal developer this is a natural parameter, but the pace of increase is no longer mere sector background. It determines how much of the income-statement improvement is accessible to shareholders.

Funding Is Not A Covenant Problem, It Depends On Project Surplus Timing

The relevant cash frame here is all-in cash flexibility, meaning liquidity after actual cash uses: operating cash flow, investment cash flow, financing cash flow, repayments and interest. On that frame, the quarter still consumed cash. Operating cash flow was negative NIS 53.5 million, compared with negative NIS 70.5 million in the comparable quarter. Positive investment cash flow of NIS 15.2 million and positive financing cash flow of NIS 20.1 million narrowed the gap, while cash still declined from NIS 34.1 million at the end of 2025 to NIS 15.9 million at the end of March.

The board determined that there is no liquidity problem despite ongoing negative operating cash flow, and the assumptions behind that determination show where the risk has moved. The review included cash of NIS 15.9 million, expected expenses and investments of NIS 830.7 million, current liabilities of NIS 430.6 million and non-current liabilities of NIS 226.3 million. Against those needs, the company relies on planned new bond series, NIS 70.7 million of credit facilities, alternative financing offers, partners and NIS 787.8 million of project surplus after Series B and C repayment.

This is not an immediate covenant weakness. The company states that it complies with the financial covenants of its bond series. The debt itself is fixed-rate and unlinked: Series B, C and D bear 9.5%, 7.2% and 6.8% interest, respectively, and their total nominal amount near the report date is about NIS 224.2 million. At the same time, credit for construction costs in projects under execution was NIS 94.6 million, and total bank and institutional credit on the consolidated balance sheet was NIS 131.2 million.

The yellow flag is the linkage between funding layers. The cross-default disclosure shows that an acceleration event in one series or one material loan can trigger causes in other series or project financings. As long as projects advance and surplus is released, this structure works. If the release pace is delayed, the question will not only be how many units are in the backlog, but at what financing cost the company can keep moving them into execution.

Conclusions

The first quarter improves the read of Av-Gad because it shows more genuine gross profit and indicates that execution activity is now large enough to carry part of the report without the Kinneret City revaluation. That is progress from 2025. At the same time, the balance sheet and cash flow say the company is still in a phase where growth consumes cash: the gap between recognition and customer advances widened, operating cash flow remained negative, and financing costs erased operating profit.

The current read is a partial proof quarter, not a full turning point. What would support the thesis over the next quarters is actual launch of some of the eight planned projects, higher collections and advances, and stable gross profit without another widening in the working-capital gap. What would weaken it is a continued rise in contract assets without advances, further delays in surplus release, or an escalation in Kinneret City that turns the accounting value into a pressure point. The business significance is simple: in urban renewal, growing backlog is not enough. The backlog has to move through financing, execution and collections until it becomes value accessible to shareholders.