Freedom Holding Corp. — Form 10-Q Summary
Business context and period. This unaudited report covers the three months ended June 30, 2023, the first quarter of Freedom Holding’s fiscal year. The group provides brokerage, banking, insurance, investment-banking, payment-processing and digital-commerce services, with its largest operations in Central Asia and Eastern Europe. Unless noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Quarter ended June 30, 2023 | Comparable 2022 period |
|---|---|---|
| Net revenue | $316.2 million | $172.5 million |
| Income from continuing operations | $67.9 million | $43.1 million |
| Net income attributable to common shareholders | $68.1 million | $61.1 million |
| Basic / diluted earnings per share | $1.16 / $1.15 | $1.03 / $1.03 |
| Net interest income | $54.3 million | $8.5 million |
| Operating cash flow | $(914.1) million | $(265.4) million |
| Investing cash flow | $(269.5) million | $(184.3) million |
| Financing cash flow | $1,258.5 million | $338.2 million |
- Total expenses were $231.6 million, up 92%; income before tax was $84.6 million. Income from continuing operations was approximately 21.5% of net revenue.
- Revenue growth reflected higher interest income ($149.3 million), insurance underwriting income ($44.9 million), trading-security gains ($31.8 million) and foreign-exchange gains ($19.3 million). These were partly offset by a $30.6 million derivative loss, mainly realized losses on currency swaps.
- Fee and commission income rose 10% to $98.7 million, although brokerage-service fees fell 34% to $55.1 million. Payment processing and bank-service fees helped offset the decline.
- At June 30, total assets were $6.54 billion, total liabilities $5.71 billion and shareholders’ equity $825.7 million. Cash and cash equivalents were $597.4 million; restricted cash was $501.9 million. Management-defined net liquid assets were $1.92 billion.
- Trading securities were $3.37 billion. Securities repurchase obligations rose to $2.57 billion from $1.52 billion at March 31; customer liabilities were $2.12 billion. Debt securities issued were $65.0 million, principally 5.5% bonds due October 2026.
- Loans issued were $1.06 billion net of allowance; the allowance for credit losses was $41.7 million at quarter-end. The company adopted CECL on April 1, 2023, increasing opening credit-loss allowances and reducing retained earnings.
Material changes versus the prior period
- Net revenue increased 83%, while continuing-operations income increased 57%. The prior-year quarter included $15.9 million of discontinued-operations income; 2023 did not.
- Interest expense more than doubled to $95.0 million, primarily due to greater repo financing and higher customer deposits. Payroll and bonuses rose 93%, and general and administrative expense rose 111%, reflecting business expansion, acquisitions and operating costs.
- Operating cash outflow widened substantially, mainly as trading securities increased by $933.3 million and margin lending and other receivables increased by $147.4 million. Financing inflows, led by repo proceeds, more than offset operating and investing outflows.
- The group acquired Aviata and Internet-Tourism and obtained control of Arbuz during the quarter, increasing goodwill to $51.0 million from $14.2 million. It also ceased consolidating Freedom UA from April 1, 2023, after determining it no longer had effective control.
- Regional results shifted: Central Asia and Eastern Europe generated $282.8 million of revenue, while Europe excluding Eastern Europe generated $25.4 million versus $69.5 million a year earlier. Management attributed much of the European decline to lower FST Belize trading activity through Freedom EU.
Outlook, risks and unusual items
- Management expects acquisitions and organic expansion to continue and stated that current cash, expected operating cash generation, trading returns and potential access to capital should meet anticipated financing needs. No specific earnings or revenue guidance was provided.
- The company plans to reduce and ultimately eliminate its omnibus brokerage arrangement with related party FST Belize. At June 30, receivables from related parties totaled $384.7 million; approximately $373.7 million was due from FST Belize, whose owner is the company’s CEO, chairman and controlling shareholder. These balances were described as collateralized, and management considers them collectible.
- Repo financing is short-term and substantially secured by trading securities. Approximately 76% of the proprietary trading portfolio was subject to repo obligations at June 30. The portfolio includes significant Kazakhstan government and quasi-government exposures; two issuers each exceeded 10% of trading securities.
- Risks include the Russia-Ukraine conflict, sanctions and countersanctions, market and currency volatility, credit and collateral risk, regulatory requirements, and acquisition integration. Freedom UA’s license was suspended and assets frozen by Ukrainian authorities; the company reports it is not consolidated after loss of control.
- On August 24, 2023, after quarter-end, S&P placed FRHC’s rating and ratings of several operating subsidiaries on CreditWatch with negative implications, citing potential counterparty and franchise risks related to disclosures and third-party allegations.
- Management concluded disclosure controls were ineffective due to material weaknesses, including insufficient qualified U.S. GAAP accounting staff and control deficiencies over complex transactions, cash-flow classifications and financial-statement disclosures. Remediation plans include hiring, training and external assistance; management said the weaknesses were not yet remediated.
- Other items: the company reported $59.1 million of lending-related commitments and guarantees; committed approximately $9.7 million and $5.9 million for an office-building project in 2023 and 2024, respectively; and reported a Utah estate dispute over assets from a 2011 transaction, with $8.4 million and shares deposited with the court. A further $2.5 million acquisition was completed on July 26, 2023.
Most important facts for investors to verify
- Whether FST Belize receivables remain fully collateralized and collectible, and how quickly the related-party omnibus business is being reduced.
- The quality, liquidity and concentration of the trading portfolio, including Kazakhstan sovereign and quasi-government securities, and the scale and terms of repo funding.
- Loan growth, delinquency trends and credit-loss allowances following CECL adoption.
- Progress in remediating the disclosed material weaknesses and any subsequent reporting or control issues.
- Effects of the S&P CreditWatch action, sanctions developments, pending acquisitions and integration costs on counterparties, liquidity and capital needs.