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When I blogged May 23 that AirAsia had its third-quarter net profit soar more than six times from a year ago -- to RM86.9 million for the quarter ended March 31 from RM14.1 million in the same period of the previous year, I thought no one had taken notice that there was more to the feel-good story on the surface.

I was wrong.

Yesterday, according to The Edge, Citigroup Equity Research recommended investors to sell AirAsia Bhd shares to take profit, given the low-cost carrier's rich valuations and its rising investment risks.

Now, let's flashback a little. May 23, Screenshots said in The up-and-down of No-Frills Flying:

If you remember, media reports dated February 2007 stated that the Ministry of Finance, for which the Prime Minister is the Minister, has already issued a letter to the the Malaysian Accounting Standards Board (MASB) to allow AirAsia to use the International Financial Reporting Standard (IFRS).

Such a move, said media reports, would help boost AirAsia's profits as it would not have to include tax charges in its books, whereas under the MASB, AirAsia is required to include taxes in its accounting. This is despite the fact that it is exempted from paying them for the next 15 years following an allowance from the Government.

Apparently, the same context I blogged one month ago was cited by Citigroup yesterday when it recommended a SELL on AirAsia. Quote Citigroup via The Edge:

"However, we are concerned about rising investment risks given lower earnings visibility and potential share overhang. There is greater uncertainty on historical and future reported earnings due to existing accounting policies on the treatment of deferred tax, investment allowances and hedging instruments," it said.

As such, Citigroup said it expected AirAsia to meet its forecast FY07 recurring profit forecast of RM198 million or a reported profit of RM400 million, if the Malaysian Accounting Standards Board approved the inclusion of deferred tax credits in AirAsia's audited accounts.

FY09E: Net debt to equity level circa 300%

We may have now come to realise the bases why the Citigroup research house had rated AirAsia as "sell/high risk (3H)", with a 12-month target price of RM1.66.

Citigroup said, with a PE of 22 times, AirAsia was trading at 23% premium to global sector peers with similar earnings per share growth and 24% premium to the Malaysian market.

In addition, Citigroup cautioned that there could be potential share overhang given recent significant off-market transactions that led to a reduction in Tune Air Sdn Bhd's stake.

"We estimate AirAsia's net debt to equity level would rise to circa 300% by FY09E and AirAsia will likely need to raise more capital to fund the remainder of its Airbus aircraft purchase as its gearing level is already high," Citigroup added.

On the question of hedging instrument, Citigroup said rising fuel prices remained a key concern in FY08, given that fuel accounted for 50% of AirAsia's operating costs and it was unhedged from July 2007.

On the phenomenon of AirAsia's growth, Citigroup punctuated its advisory by saying that AirAsia had garnered a significant market share of 50%, compared with 30% in FY06, in less than a year since the domestic route rationalisation took place.

I got interested in tracking AirAsia after a couple of new shareholders started to surface in Fly Asian Xpress (FAX) and ECM-Libra Avenue, respectively.

God willing, I will keep watching.