LGMS’s 1HFY23 met our expectations. Its 2QFY23 net profit more than doubled QoQ driven by an effective product portfolio realignment. It recently launched a cost-effective and user-friendly cybersecurity solution called StarSentry for SMEs is expected to widen its addressable market. We keep our earnings forecast, TP of RM1.32 and OUTPERFORM call.

Within expectations. LGMS’s 1HFY23 earnings of RM5.2m (-15.7% YoY) accounted for 37% of both our full-year forecast and the full-year consensus estimate. We deem the results to be largely within expectations as we anticipate better earnings delivery in the following quarters ahead.

Results’ highlights. YoY, LGMS’s 1HFY23 revenue experienced a slight dip of 3%. This was attributable to the slower revenue recognition from the cyber risk management segment and cyber threat response segment offsetting the 23% increase from its cyber risk prevention segment (which contributes c.81% to the group revenue). However, there were significant QoQ improvements recorded in 2QY23 with revenue increasing 45% QoQ while net profit doubled on improved margins. Overall, this led to 1HFY23 net profit of RM5.2m, closing the gap to previous year 1HFY22’s RM6.2m.

Streamlining its portfolio. The group has embarked on a journey to realign its portfolio, optimising its resource allocation to yield better revenue recognition. The shift has already demonstrated its impact in the reported quarter and is expected to continue benefiting subsequent quarters. Additionally, LGMS has introduced "StarSentry" (code name: Project Mars), a plug-and-play device that seamlessly connects to users' networks, autonomously analysing all connected devices for vulnerabilities. Notably, LGMS's StarSentry was awarded the Cyber Security Product Innovation of the Year at the recent Cyber Digital Services Defence & Security Asia (CyberDSA) 2023. This product, tailored for SMEs seeking cost-effective and straightforward security solutions, is poised to contribute positively to the group, with more meaningful impact in FY24.

Forecasts. Maintained

We maintain our TP of RM1.32 based on an unchanged 25x FY24F PER, in line with peers’ forward mean. 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 - 29 Aug 2023