LGMS is an expert in cybersecurity penetration testing that thrives in both economic boom and down cycle. For instance, the 2008 economic downturn resulted in cybercrime hitting a record high in the US while an economic boom is expected to drive the adoption of digitalisation and in turn increase demand for cybersecurity. A fascinating fact is that the group’s impressive revenue growth of 17.6% CAGR in the last three years was achieved by word of mouth from customers and partners such as Alibaba Cloud, TIME dotCom, Measat, and top commercial and investment banks in Malaysia. With the IPO proceeds, the group will expand its talent size, regional presence and launch its new blockbuster product (Project Mercury). Initiate with an OUTPERFORM call with TP of RM1.50.

Growing need for cybersecurity. Protégé Associates projects the cybersecurity industry in ASEAN to grow at a 14.2% CAGR from RM14.7b in 2021 to RM28.5b in 2026. But we are confident that LGMS can outdo the industry to grow at 21.3% CAGR during the same period premised on the group’s: (i) technological leadership in the cybersecurity space, (ii) natural expansion in total addressable market as the need for cybersecurity grows alongside the increasing adoption of digitalisation especially in the ASEAN market, and (iii) growing emphasis on cyber resilience as part of ESG strategies among organisations.

Deep moat. With LGMS being the only Malaysian company with Payment Card Industry Approved Vendor Scanning (PCI ASV) accreditation and its bi-lingual advantage to deal with both Chinese and western customers, the group is in a sweet spot to ride the increased demand for cybersecurity. The group has recently also developed a new product (Project Mercury) which is aimed to revolutionise the process of attaining PCI certifications which is required on an annual basis. This is one-of-a-kind automated software which does not require human assessment; hence margins will be very lucrative.

Initiate with OUTPERFORM recommendation and target price of RM1.50. Our valuation is based on FY24F PER of 25x, in line with peers’ forward mean. We peg the valuation to FY24F EPS to capture the group's long-term earnings potential from Project Mercury. We like LGMS for its: (i) unique exposure to the growing cybersecurity business, (ii) the deep moat around its business given the high barrier to entry created by the tough qualification process as a vendor, and (iii) new proprietary certification software which is expected to be the next earnings driver. There is no adjustment to our target price based on ESG given a 3-star rating as appraised by us (see Page 10).

Risks to our call include: (i) longer-than-expected gestation period for its regional expansions, (ii) economic downturn resulting in customer lowering budget allocated for cybersecurity, (iii) reluctance to spend on cybersecurity services due to the lack of knowledge and awareness in emerging countries, and (iv) failure to maintain the extensive list of accreditations due to potential loss of critical talents.

Source: Kenanga Research - 27 Oct 2022