Share price has slid more than 10% since our last downgrade and we believe that downside to our bear case target price of S$1.50 is now limited. Moreover, we feel that the counter's continued presence in the FSSTI basket, resilient performance in 4Q09, and solid final dividend prospects (FY09 gross yield of 12%) will lead to improved investor sentiment in the near term. Upgrade to BUY, unchanged target price of S$2.10.

Valuations now more compelling. Share price retreated to a low of S$1.51, and has underperformed the STI index by about 18%, since our last downgrade. The stock is now trading close to historic lows of 8x forward earnings, compared to HK-listed peer HAECO, which is trading at 11x FY09 earnings. Hence, we believe that the decline in next year's earnings is more than fairly priced in now, and the stock is well poised for a rebound.

Continued presence in the FSSTI index. Contrary to market concerns regarding its liquidity, SIA Engineering maintained its "blue chip" status and continued to be one of the 30 constituent stocks of the FSSTI index, following this month's review. To recap, battered real estate counters Yanlord and Keppel Land were replaced by defensive transport stocks SMRT and Comfort Delgro in the annual review conducted by SGX. This should remove any short-term sentiment overhang for SIE.

4Q09 performance should still be resilient, healthy final dividends expected. We expect that the fall off in maintenance demand caused by SIA's capacity cuts will mainly come in from 1QFY10 onwards and total dividend payout in FY09 should still be similar to FY08 levels of 20Scts. Owing to its strong free cash flows, SIE has been able to pay out record dividends in the worst of years ? even declaring special dividends in SARS-hit FY04, when earnings had declined by a whopping 32%. Hence, we upgrade our call to BUY, given the attractive ~9% yield solely from final dividends and limited downside potential at current prices. Target price is maintained at S$2.10.