Freedom Holding Corp. — Form 10-Q Summary
Period: Fiscal second quarter and six months ended September 30, 2018; fiscal year ends March 31. Financial statements are unaudited. Unless stated otherwise, amounts below are U.S. dollars in millions. Prior-year comparatives were recast.
Business context
Freedom Holding provides retail brokerage, banking-related services, investment counseling, securities trading, investment banking and underwriting, primarily in Central Asia, with operations in Russia, Kazakhstan, Cyprus, Ukraine and Uzbekistan. Management reported more than 100,000 client accounts, over $18 billion in transaction volume for the six months, and 49 retail offices.
Financial performance
| Metric | Three months ended Sep. 30, 2018 | Six months ended Sep. 30, 2018 | Prior-year comparable |
|---|---|---|---|
| Net revenue | $17.439m | $25.386m | $35.824m and $49.808m |
| Net income/(loss) | $1.715m | ($4.623m) | $27.412m and $35.401m |
| Basic and diluted EPS | $0.03 | ($0.08) | $1.22 and $2.09 |
| Comprehensive income/(loss) | ($3.808m) | ($16.841m) | $36.436m and $42.198m |
Quarterly revenue fell 51% year over year and first-half revenue fell 49%. Fee and commission income rose to $12.786m for the quarter and $18.759m for six months, while trading-securities gains fell sharply to $4.317m and $1.028m, respectively. Six-month foreign-exchange operations recorded a $3.248m loss versus a $1.615m gain a year earlier. Operating expense increased 166% to $10.044m for the quarter and 157% to $19.155m for six months. Net income as a share of revenue was approximately 9.8% for the quarter and negative 18.2% for six months; the filing does not present a conventional operating-margin measure.
Foreign-currency translation losses of $5.523m for the quarter and $12.240m for six months substantially reduced comprehensive results. Management attributed currency pressure partly to depreciation of the tenge and ruble against the U.S. dollar.
Financial position, cash flow and liquidity
- At September 30, total assets were $317.155m, down from $350.902m at March 31; stockholders’ equity was $109.861m, down from $127.032m.
- Cash and cash equivalents were $39.810m, versus $65.731m at March 31; restricted cash was $29.560m. Management reported working capital of $88.899m, compared with $95.376m at March 31.
- Trading securities were $148.407m, down from $212.595m. Brokerage and other receivables increased to $80.202m from $24.885m, including margin-lending receivables of $37.051m.
- For the six months, operating cash flow was negative $17.222m, investing cash flow negative $4.015m, and financing cash flow positive $11.453m. Cash, cash equivalents and restricted cash declined by $18.323m, including an $8.539m adverse foreign-exchange effect.
- Repurchase-agreement obligations were $77.578m, down from $154.775m. Issued debt securities rose to $23.555m from $11.222m; loans received were $3.604m, down from $7.143m. These are material funding obligations; the filing does not provide a single conventional net-debt figure.
Material changes, outlook and risks
- Growth in brokerage commissions and interest income was outweighed by weaker trading gains, foreign-exchange losses and sharply higher expenses. Management linked expense growth to expansion, including payroll, rent, advertising and share-based compensation.
- The company completed acquisitions/mergers of Asyl in April and Nettrader in May 2018, both described as entities under common control. Asyl added about 16,000 Kazakhstan client accounts; Nettrader added about 16,000 Russian accounts and completed the acquisition of the Tradernet platform. The filing reports approximate acquisition values of $2.2m and $3.8m, respectively. Comparative financial statements were revised for these transactions and related presentation changes.
- Freedom24 subsidiary First Stock Store was disposed of during the quarter for $7,000, producing a $15,000 loss; its operations and employees were transferred to Freedom RU.
- Management said current cash, expected operating cash generation and forecast trading returns should cover working-capital needs for the next 12 months. It also said further expansion may require outside financing, which may not be available on acceptable terms. No quantified earnings or revenue guidance was provided.
- Management disclosed approximately $69m invested in one proprietary-trading security, describing the position as highly leveraged and still open at the report date. It warned that an adverse move or inability to liquidate could materially affect liquidity, capitalization and results.
- Other material risks include leveraged and collateralized trading, market and currency volatility, regulatory requirements across jurisdictions, and dependence on access to financing. Routine legal and regulatory matters were reported; management did not expect a material adverse effect but could not estimate future legal fees. Operating-lease commitments totaled $8.524m. The company reported no off-balance-sheet financing arrangements and no material subsequent events through November 13, 2018.
- Related-party commission income was $11.183m for the quarter and $15.622m for six months, a significant portion of reported fee and commission income. The CEO/chairman was the controlling shareholder and made $0.225m of capital contributions during the half-year.
Important facts for investors to verify
- Identify the single-company, highly leveraged $69m trading position, its collateral and financing terms, and its subsequent performance.
- Assess the sustainability and cash conversion of commission growth, the concentration of commission income from related parties, and the effect of rising operating costs.
- Review exposure to tenge and ruble movements, including foreign-currency funding, bonds and translation effects.
- Reconcile liquidity and collateral availability, including restricted cash, repo obligations, customer liabilities and securities pledged or subject to financing arrangements.
- Confirm the effects of the common-control acquisitions and financial-statement revisions on comparability, and monitor financing needs and lease commitments.