Recurring net income: EGP72.3mn, -19% Y-o-Y, +52% Q-o-Q, +16% vs. EFGe Headline net income: EGP45.2mn, -47% Y-o-Y, +10% Q-o-Q, -19% vs. EFGe Revenue: EGP613mn, 14% Y-o-Y, +11% Q-o-Q, +4% vs. EFGe EBITDA: EGP131.5mn, +20% Y-o-Y,+ 38% Q-o-Q, +15% vs. EFGe   Edita reported 3Q16 results, with headline earnings falling 47% Y-o-Y on higher FX losses and provisions (cEGP34mn vs. cEGP5mn) and taxes, as 3Q15 included the retroactive adjustment to reflect the reduction of Egypt’s tax rate to 22.5% from 30% (tax charge of EGP18mn in 3Q16 vs. a reversal of EGP6mn a year ago). Excluding one-offs, earnings were down a tamer 19% Y-o-Y and 16% ahead of our estimate, mainly on lower-than-expected SG&A costs. Top-line growth was solid at c14% Y-o-Y (+4% vs. estimate), driven mainly by the croissant (c37% of 3Q16 revenue) and rusks (c7%) segments that grew 20% and 89%, respectively, driven by capacity additions in 2015-16. Cake (c50%) revenue reversed a three-quarter decline advancing 4%, as volume decline eased (-15%), as consumers started accepting the Twinkies upsizing (doubling its price point to EGP1/pack; applied in Sep. 2015). Wafer revenue (c3%) increased 38% and candy (c4%) 13%. On a blended basis, revenue growth was price-driven (average ex-factory price per pack up 28%) due to the Twinkies upsizing and the introduction of new products at higher price points (including first-time cake products at EGP2-3 price points).   Headline gross margin dropped for the second consecutive quarter, albeit by a larger c4pp Y-o-Y, as FX shortages and a weaker EGP drove up costs for locally sourced and imported inputs. Also, raw material costs were affected negatively by the VAT implementation (only a 21-day impact in the quarter) under which input costs are no longer tax deductible, except for the candy segment (where 13% VAT is levied vs. only 5% for other segments). Accordingly, gross profit rose only 2% (-6% vs. EFGe). On a segmental basis, cake (+40bps) was the only segment to post margin gains. Croissant margins fell for the third consecutive quarter (-c9pp Y-o-Y; largest drop across all segments), as it has the highest imported raw material exposure.   EBITDA rose 20% Y-o-Y (+15% vs. EFGe) with the margin improving c1pp Y-o-Y as SG&A costs fell 12% Y-o-Y (-25% vs. EFGe) on lower advertising expenses (EGP5mn vs. EGP25mn, were front-loaded in 1H16), as well as tame growth in G&A costs (+6%). It is worth noting that a portion of FX losses (cEGP24mn) pertain to the differential between sourcing at the official and black market rates. Adjusting for this, EBITDA margin would have been down c3pp Y-o-Y with EBITDA flattish  (-6% vs. EFGe).   We are encouraged by the improved revenue trends and SG&A cost discipline. Like other food producers, the main challenge is managing the strong cost inflation due to a weaker EGP, which will depend on the ability to raise prices whether directly or indirectly – the company did its first-ever outright price increase in October for the croissant range (+25-50%). We have a Neutral rating on valuation grounds. (Company disclosure, Hatem Alaa, Nada Amin)   Edita Food Industries: EGP13.74 as of 10 November 2016, Rating: Neutral, FV: EGP11.80 per share, MCap: USD617mn, EFID EY / EFID.CA