Freedom Holding Corp

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Freedom Holding Corp. is a diversified financial services provider, primarily operating in Kazakhstan, Central Asia, and parts of Europe, offering brokerage, banking, insurance, and investment management services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Freedom Holding Corp. (FRHC) is a diversified financial services provider with a complex international structure, making a simple moat assessment challenging.

Business Overview

Freedom Holding Corp. (FRHC) operates across diverse segments, primarily in the brokerage, banking, insurance, and other financial services sectors. It primarily serves clients in Central Asia, Eastern Europe, and the U.S. FRHC’s services include securities brokerage, investment banking, underwriting, financial advice, insurance products, payment processing, and online brokerage platforms.

Revenue Distribution

  • Brokerage: This segment includes activities such as securities trading, research, and advisory services. A significant portion of FRHC’s revenues has historically come from brokerage activities.
  • Banking: FRHC’s banking segment offers commercial and investment banking, and traditional consumer banking products and services.
  • Insurance: This segment provides life, health, and casualty insurance products to both individuals and businesses, generating revenue through premiums.
  • Other: This segment encompasses various smaller revenue streams, including investment research services.

FRHC’s revenue mix is evolving, with an increasing emphasis on its banking and insurance operations alongside traditional brokerage.

The financial services industry is undergoing significant transformation, including increased digitalization, consolidation, and regulatory scrutiny.

  • Digitalization: The rise of fintech is disrupting traditional financial services with more mobile apps and digital platforms. The need to provide better and more accessible financial services is constantly increasing.
  • Regulatory Changes: Regulations are increasing around financial activity, and companies are facing the need to adhere to more compliance.
  • Consolidation: The financial services industry is going through a wave of consolidation with mergers and acquisitions becoming increasingly common among companies.

Competitive Landscape

FRHC operates in a competitive market that includes both large international players and local, smaller competitors.

  • Brokerage: Competitors include major global brokers and regional brokerage houses.
  • Banking: Competitors include local and international banks.
  • Insurance: The landscape includes many international and regional insurance providers.
  • Financial services industry in general: Highly regulated with high capital and compliance requirements, there’s an emphasis on digitalization and technology.

The financial services industry is subject to rapid and ongoing change, which can affect the competitive landscape and require strong regulatory compliance capabilities.

What Makes FRHC Different?

FRHC is distinguished by its focus on emerging markets, such as Kazakhstan, and the use of advanced technologies.

  • Emerging Markets Focus: FRHC has a strong presence in Kazakhstan and adjacent emerging markets.
  • Integrated Services: FRHC offers a diverse range of financial services under one roof, from brokerage to banking.
  • Technology Focus: FRHC is continuously investing in the latest technologies to serve its clients better.

Financial Analysis

Overall Financial Health

FRHC’s financial health is mixed. The company has shown strong revenue growth, but it also carries a high debt load and faces significant operational challenges, including the Russia-Ukraine conflict.

  • Revenue: FRHC has generated substantial revenue growth over recent years, but profitability has been variable, as a portion of revenues are dependent on brokerage and trading activities.
  • Profitability: The firm has high operating expenses, limiting profits, especially considering that it also has high debt.
  • Cash flow: Cash flow from operations is unpredictable.

Key Metrics and Justification

  • Moat Rating: 2 / 5

While FRHC enjoys some competitive advantages, mainly related to its diverse range of financial services and strong regional presence, its competitive landscape is becoming extremely challenging, and the company has limited pricing power or brand influence, limiting its moat.

  1. Intangible Assets: The Company has some brand recognition in Kazakhstan, but this is not particularly strong in other regions, and these brands are not hard to copy. The Company does have a significant regulatory advantage in the brokerage industry, which provides limited barriers to entry but at the same time, other competitors can obtain the license too.
  2. Switching Costs: Switching costs do exist within the company’s own various offerings but there is not one main service they provide for the customers to experience high switching costs.
  3. Network Economics: The company doesn’t have any considerable network economics that can give it a competitive advantage.
  4. Cost Advantage: Though the company tries to minimize their operating costs, and attempts to get low costs using digitalized technologies, it doesn’t seem to give it a major competitive advantage when comparing it to competitors.
  • Understandability Rating: 4 / 5

FRHC’s business model is quite complex but can be understood with focused study of its components. A better understanding of the industry is required to have a great understanding of its operations.

  • Its diverse business model requires a decent understanding of several financial areas.

  • The company’s international operations add complexity to its business operations.

  • Balance Sheet Health Rating: 3 / 5
  1. Debt: The company has a high level of total liabilities compared to its assets, with total assets at $8,363 million, total liabilities at $5,315 million and share holders equity at $3,048 million. Although their debt is not a primary cause of concern, it can make the company more risky, especially during economic turbulence.
  2. Liquidity: FRHC’s total cash and cash equivalents at $1,375 million may seem healthy, but due to market uncertainty, a high percentage of debt as well as fluctuating profitability, it may face some liquidity challenges.
  3. Solvency: The company’s total liabilities are greater than half of its assets, meaning the company is reliant on borrowing to fund the activities.

Risks

The key risks for FRHC include:

  • Regulatory Risk: The company is subject to financial regulations in multiple jurisdictions, so regulatory changes or fines could substantially affect its operations.
  • Market Risk: FRHC’s reliance on trading volumes leaves it vulnerable to market volatility.
  • Credit Risk: The company has significant loan activity, making it vulnerable to bad debts if they are not properly collateralized.
  • Geopolitical Risk: The Russia-Ukraine conflict and the economic instability in Kazakhstan can affect FRHC’s operations and market sentiment.
  • Execution Risk: Expansion efforts in new regions and implementation of new technology may not go as planned.
  • Cybersecurity risk

Business Resilience

While FRHC operates in a volatile environment, it has a diverse revenue stream and geographic coverage. However, the reliance on emerging economies and a high level of debt do give cause for concern.

Latest Concerns and Controversies

  • Sanctions Impact: The company’s exposure to the Russian market and sanctions compliance was a significant concern, resulting in the removal of a Russian subsidiary from the company’s operations and impacting their revenue.
  • Russia-Ukraine War: The ongoing war, and related economic uncertainty, is having a significant, negative impact on the company’s revenue.
  • Increased Credit Risk: The company’s loan portfolio has increased significantly with higher exposure to consumers with poorer credit ratings.
  • Compliance Issues: Some investors are concerned about the compliance risks of the company’s multi-national operations.
  • Management Turnover: There have been a number of executive changes, causing potential instability in the management.

Management continues to implement various programs designed to further develop and expand their operations, including improvements in financial reporting, compliance with regulations and risk management procedures.

In summary, while Freedom Holding Corp has a diverse business model and is operating in fast-growing markets, the company is faced with several risks. It is a decent play for a very high risk investor.