Freedom Holding Corp.: The Slowdown Is Coming


  • Tightening of monetary policy will constrain the CIS financial market in the medium term.
  • We expect a slowdown in the growth rate of Fee and commission income, as the inflow of new clients has slowed down significantly. Major competitors continue to grow.
  • Freedom's critical competitive advantage is the ability to participate in IPOs, and the IPO ETF is significantly inferior to the S&P 500 in 2021.

Горячий ключ для ivestment

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Investment Thesis

We formed a bullish position in the previous article on Freedom Holding (NASDAQ:NASDAQ:FRHC). Our thesis was based on the fantastic market opportunity, impressive customer base dynamics, and the company's financial performance:

Freedom Holding Corp. shares are up 64% this year. However, growth prospects are not exhausted yet. I believe this is a rare example of a growing company at an attractive price. The company is aggressively growing its customer base and its financial performance is impressive. Opportunities for future growth are also provided by market conditions.

This investment has brought us over 180%. The market environment was an essential driver for the company. We expect that monetary tightening will constrain the market in the medium term. In addition, we expect a slowdown in the growth rate of Fee and commission income, as the inflow of new FRHC clients has slowed down significantly. This is because Freedom's critical competitive advantage is participating in an IPO, and the IPO ETF is seriously inferior to the S&P 500 in 2021. We rate shares as a hold.

Deceleration Factors

The growth of the CIS financial market has been the main driver of the company's growth over the past year. In the previous article, we wrote:

Today, the brokerage market in the CIS countries is going through the same period as in developed markets several decades ago when discount brokers appeared. Today, the investment services market in Eastern Europe is experiencing a turning point: a generational change and record low key rates. These factors have led to an influx of individual investors into the stock market.

Since then, the number of individuals who have opened a brokerage account on the Moscow Stock Exchange has increased from 5 million to 14.5 million. Thus, about 10% of the Russian population participates in the stock market, significantly higher than other emerging countries (in India - 3%, Brazil - 2%, Indonesia - 1%).

Individuals with brokerage accounts on the Moscow stock exchange(Source: Created by the author, based on BCS data)

The number of active clients on the Moscow Exchange increased from 628 thousand in March 2020 to 2.5 million in September 2021.

Total active clients on the Moscow stock exchange(Source: Created by the author, based on smart-lab)

One of the primary growth drivers was the record low key rate (five years ago, the interest rate of the Russian Central Bank was 17%, but in 2020 it already was 4.25%). However, due to the global acceleration of inflation, the Central Bank rate rose to 8.50%. We expect that the tightening of monetary policy may become a constraint for further brokerage market growth in the medium term.

Freedom's customer flow has slowed significantly. It is noteworthy that the leaders of the brokerage services market in Russia - Sber and Tinkoff - continue to grow.

Customer flow(Source: Created by the author, based on companies' data)

The decrease in the growth rate of the client base is due to the decline in the attractiveness of their main product - participation in the IPO.

The Competitive Moat Has Shrunk

Freedom provides its clients with the opportunity to participate in IPOs. This is the company's key competitive advantage. The hot IPO market made FRHC the most attractive broker on the market in 2020. From March 2020 to February 2021, the Renaissance IPO ETF is up 250% versus 64% of the S&P 500, but since early 2021, the index has been well ahead of the initial public offering fund.

Renaissance IPO ETF chart
Data by YCharts
Renaissance IPO ETF total returns
Data by YCharts

FRHC fees are higher than competitors. Freedom does not provide access to unique markets. The broker's main competitive advantage was providing investors with the opportunity to participate in IPOs. However, with the normalization of the IPO market conditions, Freedom lost its main competitive advantage.


Our DCF model is not conservative. We assume that the company will continue to grow at double-digit rates, followed by a slowdown. Margins and other relative indicators are predicted based on historical dynamics and the current trend. Our assumptions are presented below:

FRHC DCF model(Source: Created by the author)

With a Stable growth Cost of Equity equal to 10.46%, the Weighted Average Cost of Capital [WACC] is 10.4%.

FRHC WACC(Source: Created by the author)

With the Terminal EV / EBITDA of 17.45x, the fair market value is $47 per share. Thus, the company is trading at a premium to the fair price.


Freedom Holding Corp has been a beneficiary of the growth of the CIS financial market. We expect monetary tightening to hold back further market growth in the medium term. Already, the growth rate of FRHC's client base has slowed down significantly relative to the market leaders. In part, the reason is that the company's core product has lost its appeal. The company's capitalization is too high. We are neutral on FRHC.

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It is generally accepted that the increase in the number of securities in the portfolio certainly leads to a decrease in the total investment risk. This statement, originated in academia, is built on two important assumptions: investment opportunities must have the same mathematical expectation (range of all possible relative outcomes including negative, taking into account the probability) and not to have cross-correlation (i.e., the movement of some securities should not repeat the movement of others).However, this does not happen in life, and we are forced to work hard to find attractive opportunities for capital investments. Let’s say we have two companies with the same expected return, but one carries a risk of capital loss of 5% (suppose that risk is measured exclusively quantitative indicators, although this is not the case), and the second - 1%. Wider range of expectations of the first company only increases the overall risk portfolio. We prefer to focus on a few companies with high potential growth and near-zero risk of loss invested capital rather than excessive diversification that only reduces profitability and increase the risk. In other words, investment is by no means solving a math exercise. Investment is a gold washing process (it is desirable that the prospector also possessed Picasso's view on everyday things). Another question is where to find gold? If you want to beat the market, you have to look where the other 99% of the market participants do not. We research undercovered stocks from around the world looking for growth, deep value, and distressed companies.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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