Freedom Holding Corp. — Form 10-Q summary
Reporting period: Quarter and six months ended September 30, 2020, the second quarter and first half of the company’s fiscal year ending March 31, 2021. Comparisons are with the corresponding 2019 periods. Financial amounts below are in U.S. dollars; millions are rounded. The interim statements are unaudited.
Business context
Freedom Holding provides brokerage, banking, trading, investment banking and related financial services across Eurasia. It reported more than 195,000 client accounts, approximately 61,000 quarterly active accounts and 85 retail offices. Results benefited from higher client trading activity and favorable capital-market conditions; the company cautioned that these conditions may not persist.
Financial performance
| Metric | Three months ended Sep. 30, 2020 | Three months ended Sep. 30, 2019 | Six months ended Sep. 30, 2020 | Six months ended Sep. 30, 2019 |
|---|---|---|---|---|
| Net revenue | $69.7m | $33.0m | $126.1m | $62.2m |
| Net income | $23.6m | $8.6m | $47.8m | $16.9m |
| Net income attributable to common shareholders | $23.7m | $8.8m | $47.5m | $17.0m |
| Basic and diluted EPS | $0.40 | $0.15 | $0.82 | $0.29 |
| Net income / net revenue | 33.8% | 26.2% | 37.9% | 27.1% |
Quarterly revenue increased 111% year over year and six-month revenue increased 103%. Fee and commission income rose 106% for the quarter and 99% for the six months, to $54.3m and $97.6m, respectively. Trading gains were $8.3m for the quarter and $17.4m for the six months; interest income was $4.9m and $9.2m. Foreign-exchange operations generated gains of $3.0m and $2.8m, respectively. The six-month trading gain was predominantly realized ($17.1m), while the quarter included $2.4m of unrealized gains.
Expenses rose 93% for the quarter and 68% for the six months, to $41.6m and $69.1m. Fee and commission expense increased sharply with transaction volumes, reaching $20.0m for the quarter and $29.8m for the six months. Operating expenses were $15.9m and $30.3m. Pre-tax income was $28.1m for the quarter and $57.0m for the six months; income tax expense was $4.6m and $9.2m. Management attributed higher taxes to increased earnings across jurisdictions and U.S. GILTI tax.
Quarterly foreign-currency translation loss of $10.9m reduced comprehensive income before noncontrolling interests to $12.6m, versus net income of $23.6m. For the six months, translation loss was $2.3m and comprehensive income before noncontrolling interests was $45.6m.
Balance sheet, liquidity and cash flow
At September 30, 2020, total assets were $1,076.5m, compared with $453.5m at March 31, 2020. Cash and cash equivalents were $443.4m and restricted cash was $108.2m, together $551.6m. Restricted cash includes customer funds and amounts reserved for deferred distributions, so it is not all freely available. Total liabilities were $900.8m; shareholders’ equity was $175.7m.
Trading securities increased to $311.8m from $156.5m, with debt securities about 80% of the trading portfolio. Brokerage and other receivables, net, were $157.7m, including $155.6m of margin lending receivables; the allowance for receivables rose to $1.8m from $0.3m.
Debt securities issued totaled $66.5m, down from $72.3m. Securities repurchase obligations rose to $182.8m from $48.2m; related pledged collateral had a reported fair value of $182.3m. These short-term arrangements and the company’s leveraged proprietary trading expose liquidity and capital to market moves. Customer liabilities increased to $525.9m from $168.4m, reflecting higher brokerage and bank customer balances. The company said approximately 58% of trading securities were subject to repurchase obligations.
For the six months, operating cash flow was $297.0m, investing cash flow was positive $21.3m, and financing cash flow was positive $131.9m. Cash, cash equivalents and restricted cash increased $421.8m to $551.6m. Operating cash flow was materially affected by customer-liability growth of $361.6m and increased trade payables; financing inflows included $138.1m from repurchase agreements. These working-capital and financing movements are important when assessing the sustainability of reported cash generation.
Material changes, outlook and risks
- Acquisition activity: The company completed its $7.1m acquisition of Russian broker Zerich on July 2, 2020. Acquired cash, cash equivalents and restricted cash were reported at $28.0m.
- Bank Kassa Nova: The company had prepaid $4.2m and was pursuing acquisition of ordinary and preferred shares and subordinated debt, subject to conditions including Kazakh governmental approvals. The filing’s indicative amounts included approximately $41.5m for ordinary shares, $2.5m for preferred shares and $9.7m of subordinated debt at September 30; final consideration could differ due to adjustments, accrued interest and exchange-rate movements.
- COVID-19 and outlook: Management linked unusually strong client activity and market gains to pandemic-era market volatility and rebound, but said future activity and the pandemic’s financial effects could not be reasonably estimated. It believed available cash, expected operating cash flows and anticipated trading returns would meet working-capital needs for the next 12 months, subject to uncertainty.
- Key risk exposures: The filing highlights leveraged and concentrated proprietary investments, collateral and counterparty risk, market and currency volatility, regulatory and sanctions compliance across multiple countries, COVID-19, cybersecurity and remote-work risks, acquisition execution, and reliance on subsidiaries for funding. The CEO and chairman controls approximately 72.7% of outstanding common stock. The company said it did not expect to pay common dividends for the foreseeable future.
- Related parties: Six-month commission income from related parties was $72.0m. At September 30, related-party margin receivables were $145.2m, margin payables were $88.6m, and customer liabilities were $178.9m. A single related-party customer accounted for $81.8m, or 52%, of brokerage and other receivables before considering the separately reported allowance.
- Other disclosures: Management concluded disclosure controls were effective as of September 30. It reported routine legal and regulatory matters but did not identify a material pending proceeding in the provided text. No off-balance-sheet financing arrangements were reported.
Important facts for investors to verify
- How much of operating cash flow and the cash balance is attributable to customer funds, payables and other short-term balance-sheet movements, rather than recurring earnings?
- What are the maturity, collateral, counterparty and margin-call risks associated with the expanded repurchase financing and leveraged trading portfolio?
- How concentrated and collectible are related-party receivables, and what are the terms and governance safeguards for related-party business?
- What were the final costs, approvals and integration results for Bank Kassa Nova, and how did exchange-rate changes affect the transaction?
- How much of the recent revenue and earnings growth depends on exceptional market activity, trading gains and foreign-exchange movements, and whether those levels continued after the reporting date?