LGMS’s 1QFY24 met expectations. Its 1QFY24 core net profit jumped 49% YoY with better showing across its business segments, i.e. prevention, compliance and threat response. It will benefit from the recently passed Cyber Security Bill 2024 which enhances cybersecurity awareness among local corporations. We lift our FY25F earnings forecast by 13%, increase our TP by 64% to RM1.90 (from RM1.16) and reiterate our OUTPERFORM call.

LGMS’s 1QFY24 earnings of RM2.4m (+49% YoY) accounts for 12% of both our full-year forecast and the full-year consensus estimate. However, we deem the results within expectations as 1Q is seasonally a weaker quarter.

YoY, its 1QFY24 top line grew by 39% driven by increased project billings across all business segments. The key cyber risk prevention segment, which accounted for 77% of group revenue, grew by 35%. The cyber risk compliance segment rose by 44%, while the cyber threat response segment nearly doubled, albeit from a low base and the demand for its service is more ad hoc in nature as it assists in the recovery process after a hack. Its core net profit rose at a quicker pace of 49% on the back of better operating leverage.

QoQ, its 1QFY24 turnover declined 19% while net profit fell 34% from a high base in 4QFY24 as 4Q is typically the peak quarter in IT spending by corporations.

Outlook. The growth potential for cybersecurity in Malaysia and Southeast Asia is immense, as the industry is still in its early stages. Notably, on 3 Apr 2024, the Malaysian Parliament passed the Cyber Security Bill 2024, marking a significant step toward raising awareness of cyber resilience among corporations. This bill affects both individuals and businesses, particularly those within the Critical National Information Infrastructure (CNII), by mandating compliance with cybersecurity standards. Many cybersecurity incidents in Malaysia have gone unreported due to the lack of disclosure requirements, an issue the bill aims to address. Once the bill is enforced (pending royal assent), company directors may face personal liability for offenses if found negligent in their cybersecurity preparedness.

Timely enough, LGMS will be launching “StarSentry” on 4 Jun 2024, a first- of-its-kind plug-and-play device which seamlessly connects to users' networks, autonomously analysing all connected devices for vulnerabilities. Designed for SMEs to larger corporations seeking cost-effective and straightforward security solutions, this product is poised to positively contribute to the group's performance.

Forecasts. We raise our FY25F earnings forecast by 13% to account for stronger demand for its services with the government’s push towards greater cybersecurity awareness.

Valuations. Correspondingly, we raise our TP by 64% to RM1.90 (from RM1.16) based on a higher 30x (from 25x) FY25F PER, to reflect the uptrend among global peers’ forward mean such as Qualys, Fortinet and Akamai Technologies. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like LGMS for: (i) the high growth prospects of its core cybersecurity business given the under-penetrated local and regional cybersecurity 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 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 - 31 May 2024