Freedom Holding Corp. — Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended December 31, 2021, the company’s fiscal third quarter of fiscal 2022. Freedom provides brokerage, trading, investment banking and banking services, primarily across Eurasia. Unless noted otherwise, amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Financial performance
| Metric | Three months ended Dec. 31, 2021 | Prior-year quarter | Nine months ended Dec. 31, 2021 | Prior-year nine months |
|---|---|---|---|---|
| Net revenue | $145.7 million | $100.2 million | $582.6 million | $226.4 million |
| Total expenses | $94.0 million | $50.2 million | $237.5 million | $119.3 million |
| Income before tax | $51.7 million | $50.0 million | $345.1 million | $107.1 million |
| Net income | $50.9 million | $42.3 million | $307.1 million | $90.2 million |
| Diluted earnings per share | $0.85 | $0.72 | $5.18 | $1.54 |
| Net income margin, calculated | 34.9% | 42.2% | 52.7% | 39.8% |
- Quarterly net revenue rose 45% and net income rose 20% year over year. Nine-month net revenue increased 157% and net income increased 241%.
- Quarterly fee and commission income was $122.2 million, up 64%; interest income was $22.9 million, up 211%. Trading securities contributed only $0.4 million of net gain, versus $18.9 million a year earlier.
- For the nine months, fee and commission income increased 96% to $336.2 million; net gain on trading securities rose to $185.6 million from $36.3 million. Management said the 2021 trading gain was substantially driven by sales of SPBX shares and SPBX ETF units and should not be viewed as indicative of future gains.
- Quarterly expenses rose 87%, including operating expenses up 130% to $50.5 million and interest expense up 213% to $20.8 million. Nine-month operating expenses rose 125% to $117.4 million and interest expense rose 240% to $51.3 million. Management attributed increases to business growth, hiring, acquisitions, stock compensation, advertising and repo financing.
Balance sheet, cash flow and funding
- At December 31, 2021, total assets were $2.680 billion, liabilities $2.088 billion and shareholders’ equity $591.5 million. Compared with March 31, 2021, assets increased from $2.019 billion and equity from $275.7 million.
- Cash and cash equivalents were $493.3 million, while restricted cash was $404.7 million. Cash, cash equivalents and restricted cash totaled $898.0 million; a substantial portion of restricted cash relates to brokerage customers and is not freely available for general corporate use.
- Trading securities were $1.349 billion. Repurchase agreement obligations were $710.3 million, up from $426.7 million at March 31, 2021; $710.3 million of trading securities were pledged as collateral. Debt securities issued totaled $105.4 million, and loans received were $3.5 million. Customer liabilities were $1.145 billion.
- Nine-month operating cash flow was negative $582.1 million, compared with positive $699.0 million in the prior-year period. The filing attributes the outflow mainly to increased trading securities, margin lending receivables and related working-capital movements. Investing cash flow was negative $6.1 million; financing cash flow was positive $338.8 million, principally from repo financing and bond issuance.
- Management reported net liquid assets of $2.175 billion using its stated definition, which includes cash and cash equivalents, trading securities, brokerage and other receivables, and other assets. Management believes available cash, expected operating cash generation and anticipated access to capital will cover financing needs for at least 12 months.
Material changes, outlook and risks
- Growth in client activity and brokerage services drove fee income; the company reported approximately 370,000 client accounts and 100,000 active accounts for the quarter. The company also expanded its banking activities, including a Russian subsidiary’s receipt of a universal banking license during the quarter.
- In July 2021, the company reduced its direct ownership in Freedom Finance Ukraine from approximately 32.9% to 9% to comply with Ukrainian foreign-ownership restrictions. It continues to consolidate the business as a variable interest entity and provides guarantees and financial support under contractual arrangements.
- Management described planned acquisitions of two Kazakhstan insurance companies, Vostok asset management, PayBox and Ticketon.kz. Some require regulatory approval or definitive agreements; the filing says completion is not assured. Management also discussed continued expansion and possible future acquisitions, which may require additional financing.
- Management identified market and trading volatility, currency and interest-rate movements, liquidity and regulatory-capital requirements, margin lending and counterparty credit exposure, regional political and regulatory conditions, competition, cyber and operational risks, and the uncertain future effects of COVID-19. A 100-basis-point rate increase was estimated to reduce portfolio fair value by $47.8 million at December 31, 2021; a 10% equity-price decline would reduce equity investment values by approximately $16.2 million.
- A related-party customer accounted for 52% of brokerage and other receivables at quarter-end ($156.1 million). Related-party commission income was $83.8 million for the quarter and $234.2 million for the nine months. These exposures, along with margin receivables and payables involving related parties, warrant attention.
- The Estate of Toleush Tolmakov sued the company and a subsidiary in Utah over cash distributions and company shares. The estate seeks at least $8.38 million, interest or appreciation, 250,079 shares and other relief. The parties agreed to mediate; the company denies liability and intends to defend the matter if mediation fails. The company also held $8.5 million in restricted cash for unclaimed distributions related to the underlying matter.
- No specific earnings or revenue guidance is provided. The filing says there were no material changes to previously disclosed risk factors. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of earnings growth depends on one-time or potentially volatile trading gains, especially the realized SPBX-related gains, and what recurring earnings look like without them.
- The composition, liquidity and valuation sensitivity of the $1.349 billion trading portfolio, including the concentration in Kazakhstan Sustainability Fund and Ministry of Finance of Kazakhstan securities and the SPBX equity position.
- The collectability and terms of the $156.1 million receivable from a single related-party customer, together with related-party commissions, margin lending and payables.
- The sources, collateral and refinancing needs associated with $710.3 million of repo obligations, and the availability of cash after regulatory, customer and other restrictions.
- Progress, approvals, purchase terms and funding requirements for planned acquisitions, and any subsequent developments in the Tolmakov litigation and distribution dispute.