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Aviva Corporation (AVA.ASX; Mkt Cap $39m, $0.21) – Transformation into cloud technology - SPEC BUY

Today’s Top Pick.

Aviva Corporation (AVA.ASX; Mkt Cap $39m, $0.21) – Transformation into cloud technology - SPEC BUY

This week Aviva Corporation (AVA) announced an agreement to acquire 100% of Decimal Group, a developer of an industry-wide cloud platform for the financial industry. Prior to the agreement, AVA was effectively a shell company, controlled by Ian Middlemas, with $23M cash. Ian Middlemas has had an impressive track record with companies at their nascent development phase.

Decimal comprises a financial advice, sales and services cloud platform targeted at the financial services market. Decimal is world’s first financial services cloud platform in an industry poised for technology driven disruption.

What is exciting about the product is that it acts as a disruptive technology which has the potential to change the current state of play of the personal financial services industry. This stems from its cloud based platform which has the potential and scalability to be rolled out internationally (similar to what we have seen with Xero)

The product provides efficiencies and cost savings for financial planners, and a single end-to-end platform where financial advice, marketing, workflow, compliance and reporting occurs via 100% cloud. Decimal can both displace existing software used to advise high value clients and open up new markets for financial advisers and institutions.

Decimal will offer planners a cloud-based software package with compliance, customer relationship management, lead generation and statement of advice creation functionality. The software will be offered to independent planners and licensees who will be able to white label the services.

Importantly, Decimal are first movers in providing a cloud based/ software as a service solution for personal financial services industry, which is critical to establishing significant market share and creating a sustainable business. We believe the business has similarities and potential of REA Group, Seek, and Xero who were first movers in implementing a distributive technology in their respective industries.

The platform is well advanced with over $10M spent to date and has undergone 6 years of development. This includes validation based on a variety of customer initiatives leveraging Decimal’s innovations, and a diverse and growing range of deployments. Decimal customers include the Macquarie Bank, MLC, Metlife and AMP.

The product is “ready-for-market”. However has not been officially launched in Australia. The company is targeting to launch the product in 2nd quarter 2014. The pro forma cash of $13m will be used to bolster up the sales and marketing teams to roll the product out targeting the ~17,000 financial advisors in Australia.

We also had the opportunity to meet with Decimal management prior to the recent transaction. We were impressed by calibre and experience of the team, and believe they have the requisite experience to commercialise the product.

AVA will undertake a capital return of $0.06 per share, or $11M, prior to the acquisition. Post acquiring Decimal – undertaken as an all scrip transaction – and a 3-for-1 consolidation, AVA will have 178M shares on issue. This would value the company – using yesterday’s closing price of $0.22 as a base and deducting the $0.06 capital return – at appx. $85M market cap with $13M cash. While early days, there exists significant upside potential , as the likes of peers such as XRO have demonstrated, as the Decimal product gains wider acceptance and deeper market penetration.

We recommend AVA as a SPEC BUY

http://www.fostock.com.au/announcements/aviva-corporation-ava-asx