Kenanga Research & Investment

Technology - A Bright Spot in Cybersecurity

Publish date: Wed, 04 Jan 2023, 09:42 AM

The local cybersecurity landscape in Malaysia continues to face challenges, such as data breach incidents at Telekom Malaysia and other major organisations such as AirAsia, iPay88, and Maybank. Emphasizing on data protection, the government has allocated funds of up to RM73m for cybersecurity in the previously tabled Budget 2023. With the ASEAN region still at the early stages of cybersecurity awareness, we believe LGMS (OP; TP: RM1.50) is well-positioned to ride on this structural growth, more so with its expansion plans into emerging economies such as Cambodia and Vietnam.

As the new year begins, it is clear that the local cybersecurity landscape will continue to face challenges. For instance, Telekom Malaysia ended 2022 with a database breach that reportedly has 2.7mil entries leaked from Unifi website that provides access to Unifi website back-end. However, Telekom Malaysia later issued an official statement that only 250,248 customers were affected by the data breach.

This follows a slew of worrying data leakages throughout 2022 which involved major organisations and financial institutions such as AirAsia, iPay88, KipplePay, Astro and Maybank. Government organisations such as the Election Commission, JPN, and the Accountant General’s Department of Malaysia have also been compromised. In response, Communication and Digital minister Fahmi Fadzil had last week instructed Cybersecurity Malaysia and the Department of Personal Data Protection to investigate the alleged data breaches which involved personal information of around 13m Malaysians.

With the government’s strong emphasis on data protection and cyber resilience, we believe that the allocation of RM73m in the previously tabled Budget 2023 to strengthen the nation's cybersecurity will likely remain in place. Given that Malaysia and the ASEAN region are still at the early stages of cybersecurity awareness, we remain optimistic on LGMS as a prime proxy to ride the demand growth, being a leading provider of cyber protection services. As part of the group’s expansion, LGMS will utilise a 16.9% of its RM45.7m IPO proceeds for strategic business expansion into emerging economies such as Cambodia and Vietnam to have the first mover advantage. This will allow LGMS to set a high benchmark in these countries and deepen its moat by creating a high barrier of entry.

Maintain our NEUTRAL call on the technology sector as we expect softening of demand to continue into 1HCY23 which has also been echoed by the likes of TSMC which has warned of a 15% QoQ revenue decline in 1QCY23 owing to lower capacity utilisation as wafer inventory approaches new highs. World Semiconductor Trade Statistics also tweaked its forecast for global semiconductor demand growth for 2023 to a contraction of 4.1% in end-Nov 2022 (from a 4.6% expansion forecast three months before).

Top picks. However, for 1QCY23, we are selectively positive on names that are able to weather through the current downcycle, such as LGMS and KGB.

1. We like LGMS for: (i) its 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.

2. We like KGB for: (i) it being a direct proxy to the front-end wafer fab expansion, (ii) its robust earnings visibility underpinned by both robust order book and tender book exceeding RM1b each, and (iii) its strong foothold in multiple markets, i.e. Malaysia, Singapore and China.

Source: Kenanga Research - 4 Jan 2023

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