Freedom Holding Corp. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2021, compared with fiscal 2020. Although the request metadata says “2020 Q4,” this filing is an annual report for fiscal 2021, not a quarterly report. Unless noted otherwise, financial amounts below are U.S. dollars.
Business context
Freedom Holding is a financial-services holding company headquartered in Almaty, Kazakhstan. Its subsidiaries provide retail securities brokerage, banking in Russia and Kazakhstan, investment banking and underwriting, proprietary trading, and institutional execution services through its U.S. agency-only NYSE broker-dealer. It operates across Eurasia and has access to U.S. and European markets.
The company reported more than 290,000 client accounts at year-end, including approximately 97,000 active accounts. It added about 150,000 accounts during the year. Fiscal 2021 included acquisitions of Zerich, Freedom Bank KZ and PrimeEx.
Financial results and key metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net revenue | $352.6 million | $121.9 million | +189% |
| Net income | $142.9 million | $22.1 million | +546% |
| Net income attributable to common shareholders | $142.3 million | $24.8 million | +473% |
| Basic and diluted EPS | $2.45 | $0.38 | Up from prior year |
| Net income as a share of net revenue | 40.5% | 18.2% | Higher |
| Net cash from operating activities | $565.3 million | $44.3 million | Higher |
Fee and commission income was $271.9 million, up 193%, and represented 77% of net revenue. Trading gains were $46.2 million, up 209%; interest income was $30.9 million, up 154%. Fee and commission expense increased 233% to $73.1 million, interest expense rose 121% to $27.4 million, and operating expenses grew 29% to $77.4 million. Pre-tax income was $173.0 million versus $28.1 million; income tax expense was $30.1 million, with an effective tax rate of 17.4% versus 21.34%.
Interest income less interest expense was approximately $3.5 million, compared with a small net interest expense in FY2020. The filing does not provide a conventional operating-income line or a single company-wide margin measure beyond the reported figures; the net-income-to-revenue ratio above is calculated from reported amounts.
Balance sheet, debt and liquidity
- Total assets were $2.019 billion at March 31, 2021, compared with $453.5 million a year earlier; total liabilities were $1.743 billion versus $324.5 million. Total equity was $275.7 million.
- Cash and cash equivalents were $698.8 million; restricted cash was $438.0 million. Trading securities were $736.2 million. Company-defined net liquid assets were $1.520 billion.
- Customer liabilities were $1.164 billion, predominantly brokerage customer balances. These are customer obligations, not conventional corporate borrowings.
- Repurchase agreement obligations were $426.7 million, versus $48.2 million. Debt securities issued were $68.4 million, versus $72.3 million; loans received were $3.4 million. The filing reports $74.8 million of outstanding bonds and notes in its contractual-obligations table.
- Operating cash flow increased substantially, but included an $860.4 million increase in customer liabilities, partly offset by a $507.5 million increase in trading securities. Investing cash flow was positive $97.0 million, including cash and restricted cash acquired; financing cash flow was positive $348.4 million, principally reflecting repo funding.
- Approximately 58% of proprietary trading securities were pledged under repurchase agreements at year-end. The company said each regulated subsidiary exceeded its minimum net-capital requirement; aggregate subsidiary requirements were approximately $30.1 million.
Material changes versus the prior comparable period
- Growth in brokerage activity, client accounts and market volatility drove the sharp increase in commissions and trading gains. Management attributed unusually strong activity partly to pandemic-related market conditions and government and central-bank interventions.
- Trading securities increased to $736.2 million from $156.5 million. The portfolio included $293.5 million of Kazakhstan Ministry of Finance debt and $193.7 million of Kazakhstan Sustainability Fund debt.
- Cash and customer balances expanded substantially, as did short-term repo financing. Margin receivables fell to $58.1 million from $107.8 million.
- Foreign-currency translation changed from a $14.9 million loss in FY2020 to a $1.9 million gain in FY2021.
- Acquisitions expanded the business and balance sheet. Freedom Bank KZ was acquired for $53.1 million, Zerich for $7.1 million and PrimeEx for $2.5 million. The acquired businesses contributed $1.5 million of FY2021 net revenue, according to the company’s disclosure-control discussion.
Outlook, risks and unusual items
- Outlook: Management anticipated continuing Eurasian expansion in fiscal 2022 at a scale similar to FY2021 and expected further integration of Freedom Bank KZ over the following six to twelve months. It said available cash, expected operating cash flow and trading returns, together with potential access to capital, were expected to meet current and anticipated financing needs. No specific revenue or earnings guidance was provided.
- COVID-19 and sustainability: Management linked record account growth, trading volume, commissions and net income to pandemic-era conditions and said it could not predict whether those trends would persist or return to more typical levels.
- Related-party concentration: Related parties generated $198.9 million of commission income, about 73% of total fee and commission income. The filing also identifies a related-party brokerage firm as the source of a substantial majority of annual commission revenue. Related-party transactions were a critical audit matter.
- Market and funding exposure: Proprietary positions are marked to market and include concentrated non-U.S. sovereign and corporate debt exposures. A 100-basis-point rate increase was estimated to reduce portfolio fair value by $31.1 million; a 10% adverse U.S.-dollar move was estimated to reduce pre-tax income by $42.9 million. These are sensitivities, not forecasts.
- Other material risks: The company operates under changing rules across multiple jurisdictions and faces sanctions, political, currency, interest-rate, credit, liquidity, regulatory, tax, cyber-security and third-party infrastructure risks. It disclosed prior cyber incidents with negligible impacts and stated it does not maintain cyber-risk insurance.
- Legal matter: The company and subsidiary FFIN are defending litigation concerning assets from a 2011 oil-and-gas business sale and disputed estate claims. The estate seeks $2.988 million in damages or interest; the company denies liability. Separately, $8.534 million of deferred distributions remains held for claimants who have not completed the required documentation.
- Governance and controls: CEO and Chairman Timur Turlov beneficially owned 71.3% of outstanding common stock and controls key shareholder decisions. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting. The internal-control audit excluded Freedom Bank KZ; management’s evaluation also excluded Freedom Bank KZ and PrimeEx as permitted for recently acquired businesses.
Important facts for investors to verify
- How much FY2021 revenue and earnings growth is repeatable if pandemic-driven trading activity and volatility normalize?
- What is the full economic exposure to the related-party brokerage, including revenue concentration, balances, terms and potential conflicts?
- What are the portfolio’s current issuer, country, credit-quality and collateral concentrations, and how would adverse market moves affect liquidity and capital?
- How much cash is unrestricted and freely transferable across subsidiaries, given customer-fund restrictions, regulatory capital rules and collateral arrangements?
- What are the integration results and ongoing costs of the acquisitions, especially Freedom Bank KZ, and what controls cover acquired operations?
- What is the expected resolution and potential financial effect of the estate litigation and unclaimed distribution balances?