Cilo-Blue published its second-quarter report, and it contains two lines that look like an error and are not.
Operating profit is larger than gross profit. And net profit is three times pre-tax profit.
Errors or inaccuracies are possible. Spotted something that looks wrong? Write to me and I will correct it.
What This Company Does
Per the filing, the company operates in two areas: income-producing property and residential development. Among other things it holds land in Harish, and Levinsky-Ofer as an associate.
And the distinction between the two areas is what explains every number in the report.
Income-producing property is an asset that is let and generates rent. The income is recurring and predictable, and the asset itself is measured at fair value - that is, a revaluation that flows into the income statement.
Residential development is an entirely different business: you buy land, build, sell apartments. The income is not recurring but recognised at points in time, by project progress or on handover.
A company holding both presents a report in which two different rhythms mix - and so a single quarter tells you less than it seems.
The Quarter
| NIS millions | The quarter | Share of revenue |
|---|---|---|
| Revenue | 43.0 | |
| Gross profit | 20.2 | 47.0% |
| Operating profit | 39.6 | 91.9% |
| Pre-tax | 24.2 | 56.2% |
| Net profit | 76.3 | |
| Attributable to shareholders | 76.3 | 100% |
| Basic earnings per share | NIS 0.85 | |
| Balance sheet total | 858.8 | |
| Shareholders' equity | 487.6 |
The First Line: Operating Above Gross
Gross profit: NIS 20.2 million. Operating profit: NIS 39.6 million. A gap of NIS 19.3 million - upwards.
In an ordinary business that is impossible. Operating profit is gross profit less selling, general and administrative costs - so it is always smaller.
At an income-producing property company it is possible, because income that is not sales enters below the gross line: the change in the fair value of the property assets.
When a let asset is revalued upwards, the difference is recorded as profit - and it does not arise from a sale, so it does not sit in the gross line.
And that is a real number in accounting terms, but it is not cash. Nobody paid NIS 19.3 million. What happened is that a valuer determined the asset is worth more - an assessment resting on capitalisation rates, expected rents and market conditions.
And that is why at income-producing property companies the number that matters is not net profit but NOI - the operating income from the assets less their operating costs, without revaluations. That is the number describing what the assets actually generate.
And the Second Line: Net Three Times Pre-Tax
Pre-tax profit: NIS 24.2 million. Net profit: NIS 76.3 million.
That is, NIS 52.1 million was added below the tax line - 3.15 times pre-tax profit.
That is an unusually large addition, and it usually arises from recognition of a deferred tax asset
- an accounting recognition that accumulated losses or timing differences will be offset against future profit.
The structured filing does not detail the source of the addition, so I state the fact and not the explanation.
And what can be said with certainty is this: the quarter's net profit does not represent the company's earnings power. Anyone multiplying NIS 76.3 million by four to get an annual picture is wrong by a wide margin - because both the revaluation and the tax line are one-off in character.
And the Financing and the Balance Sheet
| From operating profit | NIS 39.6 million |
| Taken out in financing | NIS 15.4 million - 38.8% |
| Left before tax | NIS 24.2 million |
| Balance sheet total | NIS 858.8 million |
| Shareholders' equity | NIS 487.6 million - 56.8% of the balance sheet |
| Leverage | 1.76 to one |
Financing took close to two fifths of operating profit here, and that is a high share. But in a property context it is normal - the whole sector is built on debt secured against assets.
And what balances it is the leverage itself: 1.76 to one. For comparison from the same reporting season: Prime Energy is at 9.4, Holmes Place at 8.8, and G City - a far larger property company - significantly higher.
Equity making up 56.8% of the balance sheet is a thick cushion - and that is what allows the company to absorb a negative revaluation, if and when the direction reverses.
And one line here is to the company's credit: zero minority interests. All NIS 76.3 million is attributable to shareholders. In this reporting season that is not self-evident - see Lapidot Capital, where 39.8% of the profit went to someone else.
What I Will Check Next Quarter
| NOI | Income from the assets without revaluation - that is the real number |
| The direction of revaluation | NIS 19.3 million positive this quarter; capitalisation rates can reverse it |
| The source of the tax addition | NIS 52.1 million below the tax line - one-off or recurring |
| The land in Harish | When it enters development, and at what scale |
| Levinsky-Ofer | It reports separately, and can be cross-checked |
| Financing | 38.8% of operating - and tied to rates and debt refinancing |
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
This report is a good lesson in how not to read a property company.
Anyone looking only at the bottom line sees profit of NIS 76.3 million on revenue of NIS 43.0 million - that is, a "net margin" of 177%. That number is correct in accounting terms and completely meaningless economically.
What actually happened in the quarter is this: the company collected rent and sold, was left with gross profit of NIS 20.2 million, paid NIS 15.4 million of financing - and all the rest was contributed by an accounting revaluation and the tax line.
And what I try to hold onto when reading income-producing property is that separation: cash flow versus revaluation. Cash flow pays interest and dividends; revaluation pays nothing. Both enter the same profit line, and only one of them works.
And what does deserve a positive note here is the capital structure. 1.76 to one and 56.8% equity is a margin of safety most of the property companies I read this month would have been glad of
- and that is exactly what decides who survives when revaluations reverse.
So the line I will open the next report with is not net profit, but rental income.
(It is important to stress: this is my personal opinion only, and nothing herein constitutes a recommendation to take any action.)
