RFL Details
Acquisition Proposal: Rubik Financial Limited (ASX: RFL) has entered into a binding Scheme Implementation Deed (“SID”) with a global banking and finance software specialist, Temenos, who intends to acquire 100% of Rubik shares via a Scheme of Arrangement for a cash consideration of AUD$0.1667 per share (representing a 52% premium to Rubik’s closing price of $0.11 of 14 February, 2017). This will value Rubik’s equity at about AUD$68 million (US$50 million) on a fully diluted basis. The Scheme is subject to approval by RFL’s shareholders and other requirements, and is expected to close by the end of May 2017. In the absence of a superior proposal, the Board of Directors has unanimously recommended the shareholders to vote in favor of the Scheme. RFL had earlier reported that it executed an extension to its long-term, exclusive partnership with Temenos and launched its Rubik Model Bank solution made on digital banking platform. The group believed that the growing need of financial institutions to meet modern consumer expectations would drive their Temenos’ products from the Legacy systems which are now being used by clients. Management highlighted that the Temenos’ products, is the ‘future-proof’ solution which would enable Credit Unions and Mutuals to offer a modern banking experience without the need for major upfront investment.
 
Decent top line performance: RFL delivered 11.4% growth in revenue to $43.3 million during fiscal year of 2016 as compared to the prior corresponding period. This growth was mainly on the back of new CWX product sales and rising project work across all groups. The growth in the top line was also driven by the project work across all product groups, and service fees on anti-money laundering projects related to Rubik’s eLodge+ product. Consequently, the underlying EBITDA rose 32.3% to $6.5 million during the period. The revenue growth is more than 10% for fourth consecutive year. The increased underlying EBITDA is more than 30% against the 20% target and has increased more than 70% when existing product capitalization is added back. The improvement in the underlying EBITDA shows that the revenue is improving and also there are benefits from the restructuring program. Moreover, the cash flow has returned to positive due to the higher underlying EBITDA, and is expected to remain positive. Additionally, the 32% improvement in the underlying EBITDA is due to the increased service fees and a focus on cost containment. The underlying EBITDA (excluding existing product capitalization) has increased by $2.2m, or 71%. On the other hand, the group reported a lower net loss after tax of $2.7 million as compared to the net loss after tax of $14.1 million in FY2015. Meanwhile, RFL has Renegotiated bank facilities during 2016 and 1-for-7 non-renounceable entitlement offer raised approx. $5 million (before costs). 

Financial Performance (Source: Company Reports)
 
Balance sheet highlights: The group enhanced their net current assets to $2.2 million in fiscal year of 2016 as compared to $0.5 million in the prior corresponding period, post adjusting for revenues received in advance. On the other hand, the group witnessed an Impairment cost of $5.3 million during the period recognized for Mortgages CGU. But this was offset by $5.8 million reduction in forecast earn out liability. Meanwhile, the group enhanced their capital position via their 1-for-7 non-renounceable entitlement offer of over $5 million (before costs). The group also renegotiated bank facilities during the year.
 
Transitioned from product to platform solutions approach: Rubik Financial is strategically transitioning from a product to a platform solutions approach and accordingly they are boosting the software and services offering. RFL has identified four key strategic areas of focus. These includes the building a digital banking platform targeting Australian Credit Unions and Mutuals, building the financial Services platform, expanding the CWX platform and building the infrastructure and development capability. Moreover, the revenue share of the product has decreased as the company is decreasing the reliance on the Wealth business and increasing the Banking and Mortgages business. As a result, RFL’s Banking business has increased by 4% from 30% to 34% while the Mortgage business has increased from 16% to 19%. Accordingly, the Wealth business has declined from 54% to 47% in FY 16. 
 
Transition from a product to a platform solutions approach (Source: Company Reports)
 
AMP Limited extended its contract with Rubik: The client AMP Limited has extended its contract with RFL for licenses of its Coin wealth management solution until December 2018. This deal includes the provision of Rubik’s scaled advice software, Provisio. The signing of AMP for a further 2+ years is testament to the value of the company’s solution.
 
Live with MyState Limited: Rubik Financial Limited has gone live with MyState Limited, which is a diversified financial services group, on the transformation of their digital channels and customer experience offering. MyState’s digital banking enhancements offer stronger security across all aspects of Internet banking, with two-factor SMS authentication for important transactions. The platforms introduce a range of features like exclusive feature of speedy and convenient ‘Balance Peek’ which gives customers the ability to check their account balance after swiping on their phone screen, without actually logging on. The logging on is also quicker and easier with the optional four-digit log-on PINs. Additionally, when mobile banking app users want to log-out all they need do is shake the phone or turn the screen down. There is a feature to reset forgotten passwords directly online from within internet banking. There is an ability to redraw mortgage balances online and access electronic statements and the ability to change PIN numbers online, to cancel a card online or update personal details wherever one is, all without having to go to a branch. In addition, there are some smaller enhancements, such as Internet page navigation changes to create a full screen for customer information and enable a faster and more streamlined Internet banking experience. Further, the technology utilizes the Temenos’ edgeConnect solution which is the global leader in banking and finance software. RFL has the exclusive license for the Temenos edgeconnect solution in Australia.
 
Fiscal year of 2017 Outlook: RFL faced pressure in fiscal year of 2016 given the volatile conditions for the banks & financial institutions. On the other hand, the group started strongly in fiscal year of 2017 with a number of new contract signings. The group’s first ADI signed for Rubik Model Bank, has gone live with MyState digital banking. The group also expanded footprint in Asia with Bank Alfalah agreement, and won contracts from a major new client in Australia, New Zealand and Indonesia for CWX. AMP signed a two-year contract extension for Coin while two of the top four banks upgraded to latest Coin version in November.  These contracts indicate the diverse set of clients the group is adding to their base. These contracts have differing implementation profiles which combined with the long-term investments being made across all product groups, makes it difficult for RFL to be precise on short-term earnings guidance. However, RFL expects modest a revenue growth in FY17.
 
Stock Performance: RFL stock had fallen over 18.5% in the last six months (as of February 13, 2017) due to concerns on the group’s profit performance. Moreover, the currently volatile conditions in the banking markets also impacted the stock sentiment. The stock has, however, risen over 45.5% on February 15, 2017 at the back of the takeover offer and is trading at its 52-week high price. We believe that it is a good time to “Sell” the stock at the current price of – $ 0.16

 
RFL Daily Chart (Source: Thomson Reuters)

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