KUALA LUMPUR: Shares of Tan Sri Tony Fernandes’ AirAsia Bhd slid as much as 2% yesterday after Citi Investment Research went against the grain and downgraded it from “buy” to a “sell”.

AirAsia fell as much as seven sen to RM3.43 in intra-day trading before closing at RM3.45, down 1.43% on heavy volumes, after Citi said there was limited upside for the counter and advised clients to “take profit” ahead of possibly disappointing 2Q11 profit.

“Our analysis of AirAsia’s operating environment and expansion plans suggest little room for upward revisions to our estimates or target price,” Citi wrote in a note yesterday, keeping its earnings estimates and RM3.70 target price unchanged.  

“Longer-term positives also appear to have been priced in,” it added, pointing out that AirAsia shares had already gained 11% since June 23, buoyed by the global record-high order for 200 Airbus A320neo planes at the Paris Air Show.

Higher jet fuel costs could cause 2Q numbers to come in at RM135 million, below expectations and the RM162 million booked in 1Q, Citi estimates. That could spell potential earnings downgrades by the street, the research house said, pointing out that its FY11/FY12 estimates are now some 7% to 12% below consensus.

Citi is the first to call AirAsia a “sell” following the stock’s recent run-up, according to Bloomberg data. Will there be more downgrades to come for the budget airline that is already seen as one of the best performing counters among its peers?

“I think we’d wait for AirAsia’s statistical numbers before deciding whether we’d change our recommendation,” said one analyst who tracks the stock.

At yesterday’s RM3.45 closing price, AirAsia shares had gained 36.4% year-to-date and was only 26 sen or 7% shy of the Bloomberg consensus target price of RM3.71.

The stock is about 6% off its recent high of RM3.67 on July 1 after yesterday’s decline. The only other “sell” call is from DBS Vickers, which has maintained its call since March. At the time of writing, there were 22 “buy” calls on AirAsia versus three “holds” and two “sells”, according to Bloomberg.

Credit Suisse had the most bullish price target of RM4.80 while DBS sees AirAsia sliding to RM2.

Citi, which also thinks AirAsia Philippines’ numbers may disappoint, said the biggest risk to its “sell” recommendation is a decline in jet fuel costs. Every US$1 per barrel decline in jet fuel cost could result in up to 1.7% increase in FY Dec 31, 2011 and 2012 recurring net profit respectively, all else remaining equal, it estimates. Citi currently assumes jet fuel costs at US$125 (RM376) per barrel for the current financial year.

This article appeared in The Edge Financial Daily, July 8, 2011.