Agthia reported its 3Q16 results with no major surprises. Earnings were flattish (+1% Y-o-Y; weakest growth since 2011) and slightly above our numbers (+6%) mainly on better-margins. Revenue was up only 3% Y-o-Y (in line) as weak flour & feed sales (-6% Y-o-Y) offset decent growth in water & beverages and food segments.   Gross margin increased c3.6pp Y-o-Y to 32.9% (vs. EFGe of 32.4%) as all segments saw margin gains (flour & feed +c80bps; water & beverages +c6.4pp; food +c14.5pp). Gross profit was thus up 15% Y-o-Y (+2% vs. EFGe). EBITDA, however, was flattish (+4% Y-o-Y; +8% vs. EFGe) as SG&A costs rose 26% Y-o-Y (in line) partly on Al Bayan consolidation (9M16 SG&A costs +33%, +19% ex. Al Bayan), which has higher distribution costs than the Al Ain water business.   Below are highlights of the company’s three segments: Flour & Feed (c53% of 3Q16 revenue) saw top-line fall 6% Y-o-Y as volumes were weak in July and August (especially in feed) as customers withheld orders expecting a subsidy removal reversal as well as a high level of subsidized inventory in the market. Feed saw the subsidy removed in full for municipalities and distributors (c60% of feed volumes) for the whole quarter with Agthia launching new products including a value range and launching some marketing support to mitigate the impact. In flour, the subsidy was removed in full for retail, trade and catering (c32% of flour volumes) from 1 Sept 2016 with the company introducing a value range for trade and catering (lower-margin) and raising retail prices in line with market while introducing a fighter band. Bakeries (c35% of flour sales) remain subsidized with subsidy to be removed gradually from 31Aug 2017. Water & Beverage revenue (c39%) was up 10% Y-o-Y driven by strong water performance that continued to gain market share (record-high 25.3% volume share in June-July 2016 reading, over 9pp above second player) as well as the Al Bayan acquisition (consolidated from 4Q15; 9M16 water revenue +27%, +12% ex Al Bayan). Alpin (Turkey) saw top-line +25% in 9M16 while losses reduced by 62%. Capri-Sun remained challenged on a declining juice market and new school regulations (9M16 juice revenue -2%).   Food division (c8%) performed strongly with 3Q16 revenue +56% Y-o-Y and gross margin of 12.6% (vs. a gross loss in 3Q15) partly as margins continued to improve for yogurt (over 7.5pp Y-o-Y in 9M16) and emerging categories (bakery, tomato paste, etc; 9M16 revenue +31%, net losses -52%).   A decent set of results in light of the subsidy change in flour & feed in Abu Dhabi with no major surprises. We reiterate our Neutral rating as we expect earnings growth to be challenging in the short-term given the gradual subsidy removal (barring any acquisitions). (company, Hatem Alaa, CFA, Nada Amin)   Agthia (AD): AED6.00 as of 1 Nov 2016, Rating: Neutral, FV: AED7.15 per share, MCap: USD981mn, AGTHIA UH / AGTH.AD