Business context and reporting period
Freedom Holding Corp. is a financial-services holding company operating primarily in Eurasia, including brokerage, banking, investment banking, securities trading and market making. This unaudited Form 10-Q covers the quarter and six months ended September 30, 2021 (the company’s fiscal second quarter and first half of fiscal 2022); comparisons are with the periods ended September 30, 2020. Amounts below are in U.S. dollars, generally millions unless stated otherwise.
Financial performance and condition
| Metric | Three months ended September 30, 2021 | Six months ended September 30, 2021 | Comparable 2020 period |
|---|---|---|---|
| Net revenue | $312.8; up 349% | $437.0; up 246% | $69.7 quarter; $126.1 six months |
| Net income | $204.5; up from $23.6 | $256.2; up from $47.8 | $23.6 quarter; $47.8 six months |
| Net income attributable to common shareholders | $204.5 | $256.3 | $23.7 quarter; $47.5 six months |
| Basic and diluted EPS | $3.44 | $4.33 | $0.40 quarter; $0.82 six months |
| Operating cash flow | $(146.1) for six months | $297.0 for six months | |
| Investing cash flow | $(7.1) for six months | $21.3 for six months | |
| Financing cash flow | $99.1 for six months | $131.9 for six months |
- Revenue mix: Quarter fee and commission income was $116.5 million, net gain on trading securities $175.3 million, and interest income $20.1 million. For six months, those amounts were $213.9 million, $185.2 million and $38.1 million, respectively.
- Margins: Net income was approximately 65% of net revenue for the quarter and 59% for the six-month period, calculated from reported amounts. The filing does not present these margins as company-defined measures.
- Balance sheet at September 30, 2021: Total assets were $2,500.5 million, up from $2,018.6 million at March 31, 2021; total liabilities were $1,957.1 million, up from $1,743.0 million; and shareholders’ equity was $543.4 million, up from $275.7 million.
- Cash and liquidity: Cash and cash equivalents were $740.4 million and restricted cash $359.8 million. The company reported net liquid assets of $2,054.1 million, a company-defined measure including cash, trading securities, brokerage and other receivables, and other assets. Some cash and securities are collateralized or otherwise restricted; most cash and cash equivalents outside qualifying U.S. bank deposits were uninsured.
- Funding and debt: Securities repurchase obligations were $537.3 million, compared with $426.7 million at March 31. Debt securities issued were $58.2 million, down from $68.4 million; loans received were $3.5 million. Customer liabilities were $1,219.4 million and should be distinguished from corporate borrowings. The company retired Freedom KZ U.S.-dollar bonds with a $10.5 million carrying value during the period.
Material changes versus prior comparable periods
- Six-month fee and commission income rose 119%, which management attributed mainly to growth in client accounts, brokerage and banking activity, acquisitions, and expansion of retail advisers and research offerings.
- Six-month trading gains increased to $185.2 million from $17.4 million. The quarter included a substantial one-time contribution associated with SPBX shares and the SPBX ETF: the company reported $179.0 million of gains related to the transaction and revaluation of retained shares. It sold ETF units to approximately 15,000 investors for net proceeds of $155.7 million.
- Operating expenses rose 121% for the six months to $66.9 million, including higher payroll and bonuses, stock compensation, advertising and professional services. Interest expense rose 261% to $30.5 million, chiefly due to increased repo financing and customer deposits.
- Operating cash flow shifted from $297.0 million provided to $146.1 million used. The company cited increased trading securities and brokerage receivables—particularly margin receivables—as key uses of cash, partly offset by growth in customer liabilities and trade payables.
- Brokerage and other receivables, net, increased to $317.1 million from $64.8 million; margin lending receivables were $308.3 million. A single related-party customer accounted for $215.3 million, or 69%, of brokerage and other receivables, net.
Outlook, commentary and risks
- Management anticipated continuing an expansion strategy during fiscal 2022 at a scale similar to fiscal 2021, while noting that growth may require additional capital and that external financing may not be available on acceptable terms.
- Management said current cash, expected operating cash generation, projected proprietary trading returns and anticipated ability to raise capital were expected to meet present and anticipated financing needs. This outlook is subject to market, liquidity and financing uncertainty.
- Management cautioned that proprietary trading gains, especially the SPBX-related gains and unrealized fair-value changes, are not indicative of future trends and may fluctuate significantly.
- Key exposures include market and interest-rate movements, foreign exchange, credit and margin lending, customer and counterparty performance, liquidity and collateralization, regulatory compliance, cyber and operational disruption, and economic or political conditions in the markets where the company operates. A hypothetical 100-basis-point rate increase was estimated to reduce portfolio fair value by $36.6 million at September 30, 2021; a 10% equity-price decline would reduce equity investments by about $7.0 million.
- Margin lending and related-party concentration warrant attention. The filing says the company monitors margin compliance and may liquidate under-margined positions, but warns that rapid market movements or illiquid collateral can prevent full recovery. Two Kazakhstan-related issuers represented significant concentrations in trading securities: Kazakhstan Sustainability Fund JSC ($417.5 million) and the Ministry of Finance of Kazakhstan ($199.1 million).
- Freedom UA remained consolidated as a variable-interest entity despite the company’s direct ownership falling to 9% after a July 2021 transfer to the company president. The company disclosed guarantees, funding and operational support obligations and an arrangement entitling it to 90% of Freedom UA’s after-tax net profits.
- Off-balance-sheet lending commitments and bank guarantees totaled $13.3 million. The Utah litigation concerning a deferred distribution payment was dismissed without prejudice on October 5, 2021; plaintiffs indicated they might refile, and mediation was scheduled for November 2021.
- The company reported effective disclosure controls as of September 30, 2021, and no material changes in internal control over financial reporting during the quarter. It disclosed no additional material recognizable subsequent events through filing.
Important facts for investors to verify
- How much of earnings and revenue is repeatable without the SPBX-related realized and unrealized trading gains; review portfolio positions and subsequent realized results.
- The collectability, collateral and terms of the $215.3 million related-party receivable and the broader $216.2 million related-party margin exposure, as well as the related-party nature of certain payables and transactions.
- The quality and concentration of the trading portfolio, including exposure to Kazakhstan-related issuers, valuation assumptions and the effect of market-rate changes.
- The drivers and sustainability of negative operating cash flow, margin-receivable growth, repo financing and the availability of unencumbered liquidity.
- Freedom UA’s support obligations, governance and consolidation treatment following the ownership transfer, and the status and potential cost of the Utah dispute.
- Whether expansion plans can be funded while maintaining subsidiary regulatory capital and liquidity requirements; management reported that regulated subsidiaries exceeded minimum net-capital requirements at period end.