LGMS Berhad Forecast Cut on Cybersecurity Headwinds

Core Earnings Slide 13.7% as AI Spending and Wage Bills Bite

LGMS Berhad posted a core PAT drop of 13.7% YoY to RM1.7 million in the second quarter of FY26, according to findings disclosed by Malacca Securities Research on 7 September 2026. For the full first half, core profit inched down just 0.5% YoY to RM3.9 million, masking the severity of the quarterly deterioration.

The earnings squeeze was driven by two structural cost headwinds: employee benefit expenses jumped 9.1% YoY, reflecting annual salary increments and performance bonuses, while IT spending surged 36.7% YoY as the cybersecurity services firm ramped up investment in artificial intelligence and security capabilities.

Compliance and Incident Response Segments Stumble

Beyond cost inflation, LGMS’s service revenue mix deteriorated in 1HFY26. The compliance segment contracted 21.3% YoY, while the incident response unit—typically a profit driver—fell 32.6% YoY, according to Malacca Securities.

The research house attributed this to weak enterprise spending on proactive cybersecurity measures. Most companies delay investing in risk prevention and compliance programmes until after suffering an actual breach, creating a cyclical demand pattern that penalises forward-looking vendors.

However, Malacca Securities expects this dynamic to shift in the second half. Rising breach incidents amid accelerated enterprise AI adoption should drive demand for LGMS’s threat detection and forensic services, with management signalling stronger incident response billings ahead.

Malacca Securities Trims Forecasts Across Three-Year Horizon

Reflecting the softer 1HFY26 outturn and cautious near-term trajectory, Malacca Securities has revised down its earnings projections. FY26 core PAT forecast was cut 15.6% to RM10.3 million (from RM12.2 million), while FY27 and FY28 forecasts fell 21.7% and 18.4% respectively to RM10.8 million and RM12.0 million.

A structural drag on earnings comes from LGMS’s 27% stake in **Antarex Holdings**, a cybersecurity incident response provider acquired for RM24.5 million with an embedded profit guarantee spanning FY26–FY28. LGMS’s share of this guarantee is RM6.6 million, but the research house notes that actual profit recognition will fluctuate based on project timelines, with management expecting heavier contributions in later years.

Valuation: Lower Multiple Reflects Execution Risk

Malacca Securities maintains a BUY recommendation but lowered its target price to RM0.70 from RM0.93, based on applying a 30.0x P/E multiple (down from 35.0x) to mid-FY27 projected EPS of 2.32 sen. At the current share price of RM0.48, this implies 45.8% upside.

The research house justified the lower valuation multiple by citing slower-than-expected demand in cyber risk prevention and compliance, a more muted earnings trajectory in FY26–27, and uncertainty around the timing of AI-driven operational efficiency gains. Despite these headwinds, the research house still views LGMS’s technology shift as strategically vital for long-term competitiveness and margin recovery.

What This Means for Retail Investors

LGMS presents a near-term earnings headwind offset by a recovery thesis tied to rising breach incidents and AI-driven margin leverage. Retail investors holding the stock face a wait-and-see period: near-term results likely remain under pressure, but 2HFY26 billing momentum in incident response services could validate management’s forward guidance.

The Antarex stake adds earnings volatility but provides downside protection via the RM24.5 million profit guarantee. Valuation at 30x forward P/E is not cheap in absolute terms, though the 45.8% target upside assumes the research house’s FY27 earnings forecast holds and the 30x multiple is justified once operational stability returns.

Investors should monitor 3QFY26 results for signs of the expected incident response rebound, as well as management commentary on cost management and AI deployment timelines. The stock remains information-sensitive to cybersecurity breach headlines, which historically drive LGMS’s incident response revenue.

Key Takeaways

• Earnings miss: Core PAT fell 13.7% YoY in 2QFY26 to RM1.7m due to elevated personnel and IT costs, plus softer compliance and incident response contributions.
• Forecast cuts: Malacca Securities cut FY26–28 core PAT forecasts by 15.6%, 21.7%, and 18.4% respectively to RM10.3m, RM10.8m, and RM12.0m.
• Recovery thesis: Incident response demand expected to surge in 2HFY26 driven by rising cybersecurity breach cases and enterprise AI adoption; however, risk prevention and compliance segments remain weak.
• Cost inflation drag: Employee benefit expenses (+9.1% YoY) and IT spending (+36.7% YoY) for AI capabilities will continue to pressure margins short-term, though management views this as necessary for long-term competitive positioning.
• Valuation adjusted: Malacca Securities maintains BUY with target price of RM0.70 (from RM0.93), based on 30.0x P/E (down from 35.0x), implying 45.8% upside from RM0.48.

Full Report: The complete research report, LGMS Berhad — Trimming Forecasts Amid Demand and Cost Headwinds, published by Malacca Securities on 7 September 2026, is available on M+ Online.

Disclaimer: This article is for informational and educational purposes only and does not constitute financial advice or a recommendation to buy or sell any security. Ratings and target prices cited are those of Malacca Securities Research and are subject to change. Always do your own research before making investment decisions.

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