Freedom Holding: Strategic Shift Into Telecom Adds Great Value

Introduction

Last year, Freedom Holding Corp. announced its strategic foray into the telecommunications sector with the creation of Freedom Telecom, forging ambitious plans to develop a streaming service tailored to the Kazakh audience. Freedom Telecom aims to become one of the largest private companies in Kazakhstan. In just a few months since its creation, Freedom Telecom already has offices in 10 key locations and plans to build a state-of-the-art 5G network by 2024-2025.

In this article, I’d like to analyze the potential impact of this strategic move, considering possible challenges the company may face in the future.

Kazakhstan’s Emerging Tech & Telecom

Kazakhstan is part of Central Asia, where internet usage is still relatively low compared to the most developed regions. However, Kazakhstan is the most developed country in Central Asia. Few people realize how far Kazakhstan has come in terms of digitalization, the comprehensive implementation of which began after the initiation of the “Information Kazakhstan-2020” program back in 2013.

The country’s ongoing digitalization and plans for a massive transition to 5G networks overlap with the background of rapid economic growth in recent years – this trend has become particularly pronounced in recent months.

Theoretically, this juxtaposition of faster economic growth and the existing goals for further digitalization should lead to growth in the country’s entire telecommunications market.

The long-established market players, represented by Kcell and Tele2-Altel, have launched limited 5G services and aim to deploy at least 7,000 5G base stations and achieve 80% population coverage by the end of 2027, according to the latest research data from Henry Lancaster. At the same time, according to the same report, the Kazakh government has put forward plans to reduce the dominance of Kazakhtelecom (the country’s largest state-owned telecommunications company) in the fixed broadband, fixed voice, and mobile markets. Against this background, market entry seems to me to be a logical step if there are sufficient financial resources to overcome the high hurdle – the telecom’s market growth should be sufficient to recoup the initial investment relatively quickly.

Freedom Holding’s Diversification Is Its Biggest Advantage

First off, let me briefly explain what is Freedom Holding. According to the company’s latest 10-K filing, headquartered in Almaty, Kazakhstan, Freedom Holding Corp. and its subsidiaries offer a wide range of financial services including securities brokerage, investment counseling, retail banking, and underwriting. They provide various investment options, margin lending, research services, and capital raising solutions globally. Additionally, they engage in proprietary trading, insurance products, and software platforms.

When we look at how the holding company has expanded in recent years, we see that financial services – the company’s main activity today – is far from being FRHC’s only focus. In recent years, Freedom Holding has actively invested in new projects that are in no way related to banking to eventually integrate them into its ecosystem.

As Eureporter writes, Freedom Holding has invested more than $100 million in promising startups in Kazakhstan, including Choco and Arbuz.kz. They also acquired the PayBox payment system, now known as Freedom Pay. The company is planning to develop a super app that will integrate all its services, according to the CEO Timur Turlov.

It’s difficult to imagine a “super app” without its own telecommunications infrastructure. The launch of Freedom Telecom should therefore greatly benefit users and transform Kazakhstan’s digital scene through the expansion of broadband networks and the introduction of 5G technology in Kazakhstan. Together with plans to build a local streaming platform, these plans represent a significant departure from FRHC’s traditional financial services model.

In my opinion, diversification of the company is the key advantage on the road to future development. In Kazakhstan, there are no companies comparable to Freedom Holding when it comes to diversification in different sectors of the country’s economy. FRHC’s closest competitor, the Kaspi Group, is active in commercial banking and e-commerce, but so far has no ambitions to enter the telecommunications or brokerage sectors. In the battle for a share of the telecommunications market, Freedom Holding will be competing with “pure-play peers” such as Kcell or Tele2 (ST:), which cannot market their services in the same way as FRHC. By this, I mean first and foremost that Freedom will be able to offer much more attractive conditions for end users thanks to the synergetic connection with the other components of its “holding”. The diversification of the business and the created ecosystem are the most important competitive advantages, thanks to which it’ll be possible to conquer a good piece of the entire market pie.

Freedom Holding And Its Recent Financials Analysis

As far as I see it, Freedom Holding has a stable financial position supported by steady growth and a strong market presence. The Q3 2024 report, published in February 2024, showed consolidated revenues increasing to $419 million, a remarkable 96% YoY rise compared to the previous year’s $214 million. Of note is the significant increase in insurance premiums, which rose 177% to approximately $79 million, demonstrating Freedom’s strategic focus on strengthening the insurance segment.

Operating expenses totaled $307 million for Q3 – an 89% increase YoY – as the company didn’t stop expanding operations and capitalizing on growth opportunities in its diverse financial services portfolio. As a result, FRHC’s net income for Q3 2024 reached $96 million, resulting in basic EPS of $1.65 and diluted EPS of $1.63, indicating a robust recovery from 2022.

Regarding the fiscal year 2024, Freedom witnessed substantial growth driven by diversified revenue streams and expansion across various business lines and regions. Its Central Asian operations, particularly in Kazakhstan, Uzbekistan, and Kyrgyzstan, contributed 86% of total revenue, amounting to $361 million, marking a notable 137% YoY increase. Furthermore, the company’s strategic expansion into European markets with the establishment of subsidiaries in key locations such as Italy, the Netherlands, Austria, and Bulgaria is, in my opinion, coming at just the right time as the company seeks to maintain its growth rates.

The new telecom and streaming projects should further diversify revenue streams as discussed above, tapping into the burgeoning demand for digital services in Kazakhstan. However, it’s important to note here that these initiatives will require substantial upfront investment and may lead to some level of uncertainty. However, I do not believe that this is a major problem for FRHC’s financials. The latest financial reports show that the company is generating many times the money it has needed in recent quarters for new acquisitions. Going forward, I expect the company will have no trouble making most of its money from brokerage commissions and financial services and channeling it into developing its non-financial part of the ecosystem.

FRHC Stock Valuation Analysis

Western investors can invest in this growth story from Central Asia via NASDAQ, where Freedom Holding’s shares are traded. But to what extent is everything I have written about above already priced in? In other words: Is today’s valuation appropriate and attractive to new potential investors? According to Investing.com, FRHC shares trade at a trailing twelve-month price/earnings ratio of just 12.55x, which seems very high compared to the industry.

But it seems to me that this ratio looks more than attractive in absolute terms. Especially when we consider that the company earns much more on the capital invested than its industry peers. For example, FRHC’s return on equity (ROE) is more than 10 times the industry’s average. Moreover, the company’s growth rates are many times higher than all industry norms.

Considering the strategic moves the company has made recently, I think a TTM P/E of 12.55 is very low, because when ecosystems like FRHC’s expand, the market usually pays higher premiums for sustainable growth and margins.

Risks and Critical Perspectives

Freedom Holding Corp. faces significant risks in its expansion into the telecommunications and streaming sector – we shouldn’t lie to ourselves that it doesn’t.

One major concern I have is the hefty CAPEX required to develop the infrastructure while building robust broadband networks and implementing 5G technology. It comes at a significant cost as one might guess, which could put a strain on FRHC’s financials and affect the company’s currently healthy profitability.

Also important to note is that entering the streaming industry presents unique challenges, particularly in licensing and content production. FRHC will have to secure the rights to a variety of compelling and exclusive content, which can be costly. Think of Netflix (NASDAQ:) and its long path to profitability. These hurdles highlight the need for effective risk management strategies to mitigate potential financial setbacks and ensure the sustainability of FRHC’s expansion efforts.

Some might fear that FRHC’s expansion into telecom and streaming could distract from its core business of financial services and thus weaken its competitive position. Finding the right balance between expansion initiatives and maintaining market strength will be critical to FRHC’s long-term success. Furthermore, managing the unpredictable regulatory environment and consumer acceptance in frontier markets such as Kazakhstan is another complex factor.

Conclusion

In conclusion, I would say that Freedom Holding’s strategic expansion into the telecommunications sector, marked by the creation of Freedom Telecom and plans for a localized streaming service, holds significant potential for further diversification of the business. Despite the challenges inherent in deploying 5G technology and complicated content licensing, I believe FRHC, with its updated ecosystem, is well positioned for future growth given the current state of the telecom market in the region. The company’s robust financial performance and stable market presence, reflected in its impressive Q3 2024 results, underline its resilience, which should not only support a massive CAPEX going forward but also provide greater clarity on where the next growth impetus should come from. The strategic initiatives position the company as a prominent player in Kazakhstan’s evolving digital landscape with significant potential for long-term value creation.

Surely, the venture into telecom and streaming is not without risks. The significant capital expenditure required for infrastructure development and the uncertainties of content production and licensing present financial challenges that need to be carefully managed. However, I think that this downside risk is already embedded in the current valuation of the company, which seems undervalued to me and quite attractive at today’s stock price level.

Based on the above, I believe that FRHC will be an interesting investment idea in emerging markets over the next few years.