Freedom Holding Corp. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2020, the company’s fiscal first quarter of 2021. The unaudited statements are in U.S. dollars; amounts below are in millions unless stated otherwise. Comparisons are with the three months ended June 30, 2019, except balance-sheet comparisons, which are with March 31, 2020.
Business context and financial performance
Freedom Holding provides brokerage, banking, trading, investment banking and related financial services, principally in Eastern Europe and Central Asia. Management attributed strong quarterly activity to increased customer trading and market activity amid the COVID-19-driven market decline and rebound.
| Metric | Quarter ended June 30, 2020 | Comparable 2019 quarter | Change |
|---|---|---|---|
| Net revenue | $56.415 | $29.249 | +93% |
| Fee and commission income | $43.339 | $22.592 | +92% |
| Net gain on trading securities | $9.084 | $2.562 | +255% |
| Net income | $24.276 | $8.214 | +196% |
| Net income attributable to common stockholders | $23.853 | $8.214 | +190% |
| Basic and diluted EPS | $0.42 | $0.14 | — |
| Operating expenses | $14.426 | $13.130 | +10% |
| Cash flow from operating activities | $690.726 | $113.566 | — |
Net income was about 43% of net revenue, versus 28% a year earlier; pretax income was about 51% of net revenue, versus 33%. These are simple ratios of reported net income and pretax income to net revenue, not separately reported company margin measures. Fee and commission expense rose 142% to $9.769 million, primarily alongside higher transaction volumes and brokerage activity. Interest expense increased 18% to $3.744 million.
Balance sheet, debt and liquidity
- Total assets were $1,169.556 million, up from $453.523 million at March 31; total liabilities were $1,007.014 million, up from $324.486 million. Customer liabilities rose to $808.752 million from $168.432 million.
- Cash and cash equivalents were $199.303 million; restricted cash was $639.372 million. Most restricted cash—$629.478 million—was brokerage customer cash and is not freely available for general corporate use. The company said the increase largely reflected customers shifting into cash and increasing deposits.
- Management reported net liquid assets of $488.269 million, using its stated measure of cash and cash equivalents, trading securities, brokerage and other receivables, and other assets. It reported this measure at $342.501 million at March 31.
- Debt securities issued were $67.584 million, down from $72.296 million. Outstanding securities carried fixed annual coupons of 6.5%–12% and maturities from May 2021 to January 2023. Securities repurchase obligations were $58.582 million, versus $48.204 million.
- Stockholders’ equity was $162.542 million, versus $129.037 million at March 31.
Operating cash flow increased sharply, but was driven principally by a $621.166 million increase in customer liabilities, as well as changes in payables and receivables. It should not be read as a comparable measure of cash generated solely from earnings. Investing activities provided $5.234 million; financing activities used $0.980 million. Cash, cash equivalents and restricted cash together increased $708.870 million to $838.675 million.
Material changes, outlook and risks
- Management linked the rise in commissions and proprietary trading gains to unusual market conditions and cautioned that similar growth may not recur. It said the longer-term effects of COVID-19 on the business and financial results could not be reasonably estimated.
- Foreign currency translation contributed $8.633 million to other comprehensive income; comprehensive income before noncontrolling interests was $32.980 million. The tenge and ruble appreciated against the U.S. dollar during the quarter.
- After quarter-end, the company completed its acquisition of Russian broker Zerich for $7.056 million. It also agreed to acquire Bank Kassa Nova, subject to approvals. The filing’s illustrative purchase-price components are subject to adjustments and exchange-rate changes.
- Management said current cash, expected operating cash flows and forecast returns from proprietary trading should meet working-capital needs for the next 12 months. No specific earnings or revenue guidance was provided.
- Management highlighted risks from market volatility, leveraged and collateralized proprietary trading, currency movements, regulatory requirements, COVID-19 and acquisition approvals and financing. It also noted that expansion may require additional capital and that such financing may not be available on acceptable terms.
- Related-party activity was substantial: related parties generated $30.790 million of commission income. A single related-party customer accounted for $68.135 million, or 66%, of brokerage and other receivables; related-party customer liabilities were $579.661 million at June 30.
- The company reported routine legal proceedings and regulatory inquiries, which management did not expect to have a material adverse effect. Management concluded disclosure controls were effective as of June 30, 2020.
Key facts for investors to verify
- Whether the quarter’s elevated trading volumes and commission income persist after the unusual COVID-19 market rebound.
- How much reported operating cash flow reflects customer deposits and other working-capital movements rather than recurring earnings.
- The liquidity and availability of cash balances, particularly the distinction between unrestricted cash and customer-related restricted cash.
- Exposure to related parties, including the significant receivables and customer liabilities, and the company’s stated collectibility assumptions.
- Proprietary trading leverage, collateral requirements, and the potential effects of adverse market or currency movements.
- Final terms, funding needs, adjustments and regulatory approvals for the Bank Kassa Nova acquisition.