LGMS’s FY22 results met expectations. Net profit grew 22% on stronger demand for its cyber risk prevention service, and from efficiency gains. The prospect for cybersecurity service in Southeast Asia is bright, underpinned by rising adoption of digitalisation amongst businesses and financial institutions. We maintain our forecasts, TP of RM1.50 and OUTPERFORM call.

Within expectation. LGMS’s FY22 earnings of RM12.6m (+22%) met our expectation.

Results’ highlights. YoY, FY22 revenue grew 16% on higher project deliveries from the cyber risk prevention segment (+35%) which more than offset the decline in contribution from the cyber risk compliance (- 6.2%) and cyber incident response (-23%) segments. Note that the cyber risk prevention segment is its bread-and-butter which makes up c.68% of the group’s revenue. Core net profit grew at a quicker pace of 22% thanks to improved efficiencies, bringing net profit margins to 38.4% (vs. 36.5% in FY21).

Optimistic for cybersecurity demand. In line with the group’s strategic expansion plan as guided in its prospectus, LGMS has earmarked c.17% (or RM7.7m) of its IPO proceeds to venture into neighbouring countries where cybersecurity awareness is still at the infancy stage. With the growing need for cyber resilience as businesses and financial institutions embrace digitalisation, LGMS is looking to quickly expand its presence in the region and enjoy the first mover advantage.

Forecasts. We maintain our FY23F net profit and introduce our FY24 numbers.

We also maintain our TP of RM1.50 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, its proprietary qualification software. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment thesis. 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. Maintain OUTPERFORM.

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 talent.

Source: Kenanga Research - 1 Mar 2023