Summary

• Softer quarterly results. To recap, LGMS registered a drop of 13.7% YoY and 0.5% YoY in core PAT to RM1.7m and RM3.9m in 2QFY26 and 1HFY26, respectively. The weaker bottom-line performance was primarily attributable to elevated employee benefit expenses (+9.1% YoY) and IT spending (+36.7% YoY) to build out its AI security capabilities, coupled with softer contributions from the compliance (-21.3% YoY) and incident response (-32.6% YoY) segments. Nevertheless, we expect to see a stronger recovery in 2HFY26, driven by a surge in incident response engagements amid rising breach cases and also customary year-end project billings.
• Surge in incident response demand. LGMS is observing an increasing trend in its cyber threat and incident response segment, spurred by a rise in cybersecurity breach incidents amidst ongoing enterprise AI adoption and digitalization. Management expects this operational momentum to translate into a stronger performance in 2HFY26 as affected companies engage LGMS for breach response and forensic services. 
• Softer growth anticipated in other segments. Conversely, growth across cyber risk prevention as well as management and compliance are expected to remain relatively subdued in 2HFY26, largely attributable to general weakness in proactive cybersecurity awareness among enterprise clients, who typically hold back spending until an actual security breach occurs.
• Cost drag from personnel and tech. The sequential step-up in employee benefit expenses in 1HFY26 was primarily driven by annual salary increments and performance bonuses. To mitigate long-term dependency on human headcount, LGMS is increasing its utilization of AI and technologies, which has also contributed to higher IT expenses in 1HFY26.
• Antarex contribution backloaded. As the RM24.5m profit guarantee from Antarex Holdings (where LGMS holds a 27% stake, representing an RM6.6m profit share) is assessed on a cumulative 3-year basis (FY26–FY28), actual profit recognition will fluctuate based on project execution timelines, with management expecting contributions to be skewed towards the later part of the period.

M+ Global View

• Following the 2QFY26 results briefing, we adopt a more cautious stance on LGMS’s near-term trajectory. While top-line momentum may improve in 2HFY26 compared with 1HFY26, supported by higher billing volumes in the cyber threat and incident response segment amid rising breach cases, we believe softer traction across the risk prevention and compliance segments will continue to constrain overall growth.
• While management’s strategic investment into AI technologies should reduce human headcount dependency and streamline service delivery over the long run, the precise timeline for operational efficiency gains and margin recovery remains uncertain. Nevertheless, we still view this technological shift as vital for LGMS’s long-term growth.
• Furthermore, while Antarex’s profit contribution may be backloaded towards the later part of the 3-year period, the cumulative RM24.5m profit provides some downside protection to LGMS’s investment, with RM6.6m of the purchase consideration retained to cover LGMS’s share of any potential shortfall.

Valuation & Recommendation

• Forecast. Given softer traction across the cyber risk prevention and compliance segments, the backloaded contribution from Antarex, as well as higher employee and IT costs, we cut our FY26-28f core PAT forecasts by 15.6%/21.7%/18.4%, from RM12.2m/RM13.8m/RM14.7m to RM10.3m/RM10.8m/RM12.0m   
• Maintained BUY recommendation with a lower TP of RM0.70. We maintain our BUY recommendation on LGMS with a lower TP of RM0.70 (from RM0.93), implying 45.8% upside from the current share price of RM0.48. Our valuation is based on a lower 30.0x P/E multiple (previously 35.0x), applied to mid-FY27f EPS of 2.32 sen. The lower valuation multiple reflects the slower-than-anticipated demand across the cyber risk prevention and compliance segments, coupled with a more subdued near-term earnings trajectory.