LGMS’s FY23 results beat expectations. We are unperturbed by a 9% dip in its FY23 net profit, which was due to an increased headcount to support its expansion. The inadequacy and hence growth potential of cybersecurity is best illustrated by the recent cyberattacks by “R00TK1T” on a few Malaysian companies. We keep our forecasts, TP of RM1.16 and OUTPERFORM call.

Above expectations. LGMS’s FY23 earnings of RM11.2m (-9.1% YoY) beat both our forecast and consensus estimate by 10%. The variance against our forecast came largely from stronger-than-expected project billings.

YoY, its FY23 top line grew 4% driven by increased project billings from cyber risk management (+9.5%) which made up 72% of the group’s revenue, which more than offset a weaker showing from cyber threat response (-13.0%) and cyber risk prevention (-4.5%).

However, its net profit dipped 9% due to higher staff cost (+26%) and IT expenses (+24%) which was an inevitable price to pay to support its expansion.

QoQ, its 4QFY23 turnover grew 28% on the back of the annual peak period for IT spending. Its net profit jumped by a sharper 61% buoyed by improved margins following the realignment of resources towards highervalue customers and more lucrative projects.

Forecasts. We maintain our FY24F numbers and introduce our FY25F projections with a 22% earnings growth.

Valuations. We also keep our TP of RM1.16 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).

Outlook. The growth potential for cybersecurity is huge given that the industry is still very much in its infancy in Malaysia and Southeast Asia. The inadequacy of cyber resilience in Malaysia is best illustrated by the recent cyberattacks by “R00TK1T” on Maxis, TNB Electron, and PADU.

LGMS recently put into the market StarSentry, a plug-and-play device that seamlessly connects to users' networks, autonomously analysing all connected devices for vulnerabilities. Tailored for SMEs seeking costeffective and straightforward security solutions, this product is poised to contribute positively to the group.

We are unperturbed by the higher staff cost from a growing headcount expansion as this is to support its expansion.

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 - 26 Feb 2024