According to a Bursa Malaysia filing, Japanese conglomerate Mitsui & Co., Ltd (Mitsui) acquired a 25% stake in LGMS on 26 Apr 2023. We understand that this is a strategic investment of Mitsui to boost its cybersecurity capabilities by leveraging LGMS’s strong list of global certifications. Likewise, LGMS will be able to: (i) tap into Mitsui’s vast global network to reach more customers, and (ii) gain insights into Mitsui’s proprietary cybersecurity systems and introduce those new services in Malaysia and ASEAN countries. We keep our forecasts and TP of RM1.50 pending guidance on potential earnings catalysts on the heels of the entrance of this prominent shareholder. Reiterate OUTPERFORM.

According to a Bursa Malaysia filing, Mitsui, a Japan-listed conglomerate with a market capitalisation of RM220b, acquired a 25% stake in LGMS on 26 Apr 2023. We believe the stake was acquired from the controlling shareholder and open market.

We are excited over this strategic alliance as it will allow LGMS to leverage Mitsui’s vast global network to widen its reach and strengthen its foothold in the cybersecurity space. Mitsui’s exposure in various businesses and industries will open many business opportunities for LGMS in untapped sectors such as healthcare, logistics, energy and F&B.

Based on our channel checks, this is Mitsui’s maiden investment in an external cybersecurity firm which speaks volume of LGMS’s capabilities. While Mitsui has its own cybersecurity business which only services the Japanese market, it sees this partnership as a move to enhance its position in the Japanese market by offering additional services that require certain credentials and certifications that are unique to LGMS. Meanwhile, LGMS will be able to gain access to the advanced technology of Mitsui’s proprietary cybersecurity systems and introduce these new services into the Malaysian market and potentially other ASEAN countries where cybersecurity awareness is still at its infancy.

Mitsui, a 75-year-old global conglomerate, has a strong international presence with 127 offices across 63 countries and over 40,000 employees. Listed on the Japanese stock exchange, Mitsui boasts a market capitalization of JPY6.45t or RM220b and generates an annual revenue of JPY11.8t or RM390b. As such, the potential of providing cybersecurity services to Mitsui’s group of companies alone may bring about very significant contributions to LGMS.

We keep our forecasts and TP of RM1.50 pending guidance on potential earnings catalysts on the heels of the entrance of this prominent shareholder. Our TP is based on FY24F PER of 25x, in line with the peers’ forward mean. There is no adjustment to our TP based on its ESG rating 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 talents.

Source: Kenanga Research - 27 Apr 2023