LGMS is putting onto the market an affordable plug-and-play SME cyber security product called StarSentry in 2QFY24. A one-of-a-kind subscription-based offering, the product will be a source of recurring income for LGMS. Seeing new business opportunities in emerging AIenabled cyber threats in the market, it is increasing its headcount from 120 to 150. We keep our forecasts, TP of RM1.16 and OUTPERFORM call.

We came away from LGMS’s investor briefing yesterday feeling reassured of its outlook. The key takeaways are as follows:

1. LGMS is launching a new product called StarSentry. This plug-andplay device, developed in-house and backed by proprietary software, offers SMEs affordable solutions to counter escalating cyber security threats. Plugged into the network, StarSentry automatically and seamlessly analyses vulnerabilities in all connected devices and recommends remedial actions. LGMS plans to offer StarSentry on a subscription-based model, priced at less than RM15,000 during the first year, with reduced amounts in subsequent years. We view this development positively as the product stands out in the market by integrating both hardware and software into a user-friendly plug-andplay setup. In comparison, similar scanning software in the market costs at least USD9,000 or approximately RM42,600 for the software alone, excluding essential hardware. StarSentry was featured last year at the Cyber Digital Services Defence & Security Asia (CyberDSA) 2023 and received the Cyber Security Product Innovation of the Year award from Fahmi Fadzil, the Communication and Digital Minister. 

2. Currently, LGMS see heightened concerns over AI-enabled cyber threats, particularly business email systems compromised by perpetrators leveraging on AI to mimic staff communication style for data phishing. Seeing new business opportunities in the surge in these sophisticated threats, the company is expanding its talent pool, diversifying service offerings, and developing an in-house AI bot for consultancy services. It is increasing its headcount from the current 120 employees to 150.

Forecasts. Maintained.

Valuations. We also keep our TP of RM1.16 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 case. We like LGMS for its: (i) the high growth prospects of its core cyber security business given the under-penetrated local and regional cyber security markets, (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 cyber security, (iii) reluctance to spend on cyber security 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 - 30 Jan 2024