Financial analysis and risk assessment of officebuilding project between subsidiaries of FPT corporation

FINANCIAL ANALYSIS AND RISK ASSESSMENT OF OFFICE BUILDING PROJECT BETWEEN SUBSIDIARIES OF FPT CORPORATION By HUỲNH PHÚC DUY Submitted in partial fulfillment of the requirements for the degree of Master of Business Administration (MBA) at the SOLVAY BRUSSELS SCHOOL OF ECONOMICS AND MANAGEMENT and HO CHI MINH CITY OPEN UNIVERSITY December 31st 2011 i DECLARATION I hereby declare that this paper submitted in partial fulfillment of the MBA degree is my own work and that all contributions from any other persons or sources are properly and duly cited I further declare that it does not constitute any previous work whether published or otherwise In making this declaration I understand and acknowledge any breaches of the declaration constitute academic misconduct, which may result in my expulsion from the program and/or exclusion from the award of the degree HCMC, December 31st, 2011 HUỲNH PHÚC DUY ii ACKNOWLEDGEMENTS To mom and dad, this is a good chance for me to express my acknowledgement for your love and education Thank you mom and deceased dad, I love you so much Thank you honey, my wife, for your sympathy and support during 2-year course as well as the research semester I also would like to highly appreciate for all people who support and help me to finish this research, especially Dr Nguyen Tan Binh, my thesis tutor, Mr Trinh Ngoc Bien, Chief accountant FPT Land Co and other classmates Again, thank you very much! HUỲNH PHÚC DUY iii EXECUTIVE SUMMARY The purpose of this research is to determine the feasibility of cooperation between companies That is to build a 15,000-square-meter office building and rent it to the land owner for a certain time after handover back This cooperation is specific because stakeholders are subsidiaries in same corporation However, distinction of profitmotivated business units might lead the lessee to refuse unreasonable lessor’s proposal The project is on the stage of negotiation that terms and conditions are not fixed yet and Detailed Drawing are not issued The research could help decision-maker to determine the lease factors for negotiation, to understand uncertainty of result, to see how input and output are related Financial analysis of the project is conducted by building excel financial model based on assumptions from experience of other projects Risk assessment is carried out by sensitivity analysis on the model and forecast simulation using Crystal Ball software The summary of this research are condensed in the following page iv SOLVAY BRUSSELS SCHOOL OF ECONOMICS AND MANAGEMENT HO CHI MINH CITY OPEN UNIVERSITY Master of Business Administration (MBA) MBA THESIS ASSESSMENT Dear: Board of Thesis Evaluation Academic Year: 2011 - 2012 Topic: FINANCIAL ANALYSIS AND RISK ASSESSMENT OF OFFICE BUILDING PROJECT BETWEEN SUBSIDIARIES OF FPT CORPORATION Student: HUYNH PHUC DUY In term of the contents, the thesis has presented a subject, which was, agreeably appropriate to the current condition within the area of project appraisal – public sector as well as private sector To the exact, the enquiry focused mostly on the assessment of the financial advantages and the possible risks occurred within certain projects In which, the student has done such important jobs as searching for data, analyzing markets and interpreting some of the riskiest factors experienced by, for example, a real-estate project or more specifically, rental office segmentation The student has shown off his knowledge achieved during his time spent studying and investigating with Solvay Brussels School This was proved by the ways he designed his research or collected useful data, as well as the ways he applied scientific criteria to vii evaluate projects’ profits leading to quantitative conclusions and some proposals to deploy the projects In term of the presentation, the thesis, with solid and comprehensible layout, has done great in clarifying the ideas that the student wished to present I present to you, Board of Thesis Evaluation, my assessment of the student HUYNH PHUC DUY and ask you to permit him to further defend his thesis General assessment: Very Good Dr Nguyen Tan Binh Advisor viii TABLE OF CONTENTS CHAPTER INTRODUCTION 1.1 BACKGROUND A FPT Corporation B FPT Land Company Limited (F.Land) C FPT Software Joint Stock Company (F.Soft) D Raising of cooperation 1.2 PROBLEM STATEMENT 1.3 RESEARCH OBJECTIVES 1.4 SCOPE & LIMITATION 1.5 PAPER STRUTURE CHAPTER LITERATURE REVIEW 2.1 INVESTMENT PROJECT LIFE CYCLE 2.2 PROJECT APPRAISAL FRAMEWORK 2.3 FINANCIAL MODEL 2.4 RISK AND RISK ANALYSIS 10 CHAPTER MARKET ANALYSIS 13 3.1 MARKET OVERVIEW 13 3.2 SAIGON HIGHTECH PARK 17 CHAPTER TECHNOLOGY ANALYSIS 19 4.1 STANDARD APPLICATION 19 4.2 BASIC DESIGN 20 4.3 CONSTRUCTION STRUCTURE & FINISHING MATERIAL 20 4.4 EQUIPMENT SCHEDULE 21 4.5 MASTER SCHEDULE 21 ix CHAPTER FINANCIAL ANALYSIS 23 5.1 TOTAL INVESTMENT AMOUNT 23 5.2 WORK BREAKDOWN STRUCTURE 24 5.3 OPERATION EXPENSE 26 5.4 DEPRECIATION SCHEDULE 27 5.5 FINANCING SCHEDULE 27 5.6 LOAN & INTEREST EXPENSE 29 5.7 INCOME STATEMENT 30 5.8 CASH FLOW STATEMENT 33 5.9 EQUITY CASH FLOW 35 5.10 LEASING OPTION 36 CHAPTER RISK ANALYSIS 37 6.1 LIQUIDITY RISK 37 6.2 RELATIONSHIP BETWEEN DOWN PAYMENT AND MONTHLY PAYMENT 39 6.3 INPUT SENSITIVITY 40 6.4 DISCOUNT RATE vs NPV 42 6.5 RESULT DISTRIBUTION & PROBABILITY 43 6.6 VALUE AT RISK 47 CHAPTER CONCLUSION AND RECOMMENDATION 48 REFERENCE 49 APPENDIX 51 x LIST OF FIGURES Figure 1-1 F.Soft profit and growth Figure 1.2 F.Soft growth plan Figure 2.1 investment Project life cycle stage summary Figure 2.2 Financial model illustration 10 Figure 2.3 Simulation by Crystal Ball software 12 Figure 3.1 Office space stock in Ho Chi Minh City 15 Figure 3.2 Future supply by grade in HCMC 15 Figure 3.3 Average asking rents grade A & B office space 16 Figure 3.4 Current asking rents of major office building in HCMC 16 Figure 3.5 Vacancy rate by grade 17 Figure 4.1 Basic Design Calculations 20 Figure 4.2 Construction schedule & Finishing schedule 20 Figure 4.3 Equipment schedule 21 Figure 4.4 Master schedule 21 Figure 4.5 A brief view of construction schedule 22 Figure 5.1 Total Investment Amount calculation 23 Figure 5.2 Total Investment Amount Breakdown estimate 24 Figure 5.3 Construction cost – Main building Breakdown (code 1a) estimate 25 Figure 5.4 Equipment cost Breakdown (code 2) estimate 25 Figure 5.5 Investment & construction consultant cost Breakdown (code 4) estimate 25 Figure 5.6 Other cost Breakdown (code 5) estimate 26 Figure 5.7 Main structure cost Breakdown (code 1.3) estimate 26 Figure 5.8 Operation expense estimate 27 Figure 5.9 Depreciation calculation 27 Figure 5.10 Depreciation schedule 27 Figure 5.11 Loan support data and Financing schedule 28 xi Chapter Risk analysis • Increasing more equity • Negotiating not to let the down payment reduce too much • Negotiating the borrowing and grace period P Q Down payment @ 15% Equity capital (VND in B) 4.25 4.5 4.75 5.25 5.5 5.75 6.25 6.5 6.75 7.25 7.5 7.75 8.25 8.5 8.75 Borrowing period (years) 275 276 277 278 279 280 281 282 283 284 285 286 287 288 289 290 291 292 293 294 295 296 297 R -2.6 -2.1 -1.7 -1.3 -0.9 -0.6 -0.3 -0.1 S Grace period (years) 0.25 -0.9 -0.5 -0.1 - T 0.5 - Figure 6.3 Additional equity depend on Borrowing period & Grace period (at Down payment =15%) If the Down payment at 15% of Total Investment, borrowing term fixed at years and grace period at years are defined, equity should be increased by 0.9 billion VND 38 Chapter Risk analysis D E Down payment @ 10% Equity capital (VND in B) 4.25 4.5 4.75 5.25 5.5 5.75 6.25 6.5 6.75 7.25 7.5 7.75 8.25 8.5 8.75 Borrowing period (years) 227 228 229 230 231 232 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 249 F G -14.5 -14.0 -13.5 -13.2 -12.8 -12.5 -12.2 -11.9 -11.7 -11.5 -11.3 -11.1 -10.9 -10.7 -10.6 -10.4 -10.3 -10.2 -10.0 -9.9 -9.8 0.25 -12.8 -12.4 -12.0 -11.7 -11.4 -11.1 -10.9 -10.7 -10.5 -10.3 -10.1 -10.0 -9.8 -9.7 -9.6 -9.5 -9.3 -9.2 -9.1 -9.1 -9.0 H Grace period (years) 0.5 -10.9 -10.6 -10.3 -10.0 -9.8 -9.6 -9.5 -9.3 -9.1 -9.0 -8.9 -8.8 -8.7 -8.6 -8.5 -8.4 -8.3 -8.3 -8.2 -8.1 -8.1 I J 0.75 -8.7 -8.5 -8.3 -8.2 -8.1 -8.0 -7.9 -7.8 -7.7 -7.6 -7.6 -7.5 -7.4 -7.4 -7.3 -7.3 -7.3 -7.2 -7.2 -7.2 -7.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 -6.1 Figure 6.4 Additional equity depend on Borrowing period & Grace period (at Down payment =10%) If down payment is negotiated at 10% of Total Investment and additional equity is 11 billion maximum, F.Land should negotiate a debt that provides term not less than years; or term years and a half with a-quarter grace period; or term years with half-year grace period Other analysis figures at various down payments are listed in appendix 6.2 RELATIONSHIP BETWEEN MONTHLY PAYMENT 39 DOWN PAYMENT AND Chapter Risk analysis Figure 6.5 Relationship between Down payment and Monthly payment (Leasing period = years, IRR = 25%, Borrowing period = years, Grace period = 0) With Down payment running in range from 10% to 20% of Total Investment Amount, monthly payment would be inversely proportional and from 460 to 400 thousand VND per square meter 6.3 INPUT SENSITIVITY On the base case on figure 5.19, key inputs sensitivity shall be tested to find out which factor have the main affect to the result The purpose of this test to pay more attention and solution to problems that could probably happen in future Calculation is conducted by run input respectively from 90% to 110% of base case value 40 Chapter Risk analysis D 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 195 196 197 E F G H I J K L M N O P -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% Total Investment Amount 213,674,808 218,423,137 223,171,466 227,919,795 232,668,124 237,416,453 242,164,782 246,913,111 251,661,440 256,409,769 261,158,098 IRR 25.0% 33.6% 31.6% 29.8% 28.1% 26.5% 25.0% 23.6% 22.3% 21.0% 19.8% 18.7% Unit price for rent IRR 25.0% 405 18.8% 414 20.1% 423 21.4% 432 22.6% 441 23.8% 450 25.0% 459 26.2% 468 27.3% 477 28.4% 486 29.5% 495 30.6% Leasing period IRR 25.0% 6.4 22.2% 6.6 22.9% 6.7 23.5% 6.9 24.2% 7.0 24.5% 7.2 25.0% 7.3 25.4% 7.4 25.9% 7.6 26.3% 7.7 26.7% 7.9 27.1% Interest rate IRR 25.0% 15.9% 26.4% 16.3% 26.1% 16.6% 25.9% 17.0% 25.6% 17.3% 25.3% 17.7% 25.0% 18.1% 24.7% 18.4% 24.4% 18.8% 24.2% 19.1% 23.9% 19.5% 23.6% Down payment IRR 25.0% 13.5% 23.8% 13.8% 24.0% 14.1% 24.3% 14.4% 24.5% 14.7% 24.8% 15.0% 25.0% 15.3% 25.2% 15.6% 25.5% 15.9% 25.8% 16.2% 26.0% 16.5% 26.3% Inflation IRR 25.0% 9.0% 26.0% 9.2% 25.8% 9.4% 25.6% 9.6% 25.4% 9.8% 25.2% 10.0% 25.0% 10.2% 24.8% 10.4% 24.6% 10.6% 24.4% 10.8% 24.2% 11.0% 24.0% Figure 6.6 Project IRR sensitivity analysis on ±10% of base element On the figure 6.4, Investment rate (or Total investment amount) is the biggest impact on project Internal rate of return With other factors unchanged and Total investment amount increasing more 10%, project IRR could decrease to less than 19% That means the project could be failure if F Land the lessor still want to get the return of 25% in lease period; or F Land the lessor internally reduce their expected return to get the project Other solution, as mentioned early, is to fix the Total investment amount by parties after the building construction This could help the lessor hedge their risk of construction phase, but could make the lessee to refuse it 41 Chapter Risk analysis Unit price for rent, or monthly payment is other biggest impact on project result The higher monthly payment, the higher project IRR With the same leasing period, monthly payment is the key factor to be negotiated carefully Leasing period is also important In this test, it just run from -10% to 10% However in negotiation, it could fluctuate more widely, from to 10 years and 0.5 year step 6.4 DISCOUNT RATE vs NPV This analysis reveals how project NPV changes by changing of discount rate, after all leasing factors are fixed The blue line show us NPV = at the base case in figure 5.19 That means, in lessor point of view, the leasing contract is fair for both parties because it brings them VND profit from the future cash flow All future cash flow received is just “enough” for their minimum expected return (NPV@25% = 0) That is also a dispute if the lessee agures that lessor had expected too much (discount rate is too high) and would like to use lower discount rate To set NPV still equal to (fair for both parties), a lower future cash flow is created and leasing factors are changed consequently (monthly payment or lease period reduce, for instance) So, if the lessor still agrees with the new leasing factors, let say new leasing factors bring rate of return of 23%, they will have a loss of billion VND (present value of all future cash flow), compared with their first expectation 42 Chapter Risk analysis D 202 Discount rate 203 NPV E F 20.0% 12,259,556 G 21.0% 9,465,507 H 22.0% 6,855,324 I J 23.0% 4,415,676 24.0% 2,134,319 K L 25.0% 26.0% (1,997,634) M 27.0% (3,868,113) N 28.0% (5,620,221) O 29.0% (7,262,057) Figure 6.7 Relationship between NPV and Discount rate The same explanation with other basic cost of equity The following figure show us how NPV change if we change the discount rate The blue line is for initital Cost of equity = 25% The red one for initial cost of equity = 20% Figure 6.8 Relationship between NPV and Discount rate at various Cost of equity 6.5 RESULT DISTRIBUTION & PROBABILITY To know the result (project IRR) distribution and probability, in other words how to ensure the success of the project, we must define the probability of input Garbe in garbe out, the model is nothing if the input is unrealistic This work of input is time consuming, detailed research and sometime feeling estimation The following figure illustrates writer’s viewpoint about its probability and assumptions: 43 P 30.0% (8,801,096) Chapter Risk analysis Crystal Ball Report - Assumptions Simulation started on 1/31/2012 at 15:02:21 Simulation stopped on 1/31/2012 at 15:02:26 Run preferences: Number of trials run Extreme speed Monte Carlo Seed Precision control on Confidence level Run statistics: Total running time (sec) Trials/second (average) Random numbers per sec 1,000 999 95.00% 4.20 238 1,669 Crystal Ball data: Assumptions Correlations Correlated groups Decision variables Forecasts 0 Assumptions Worksheet: [Final Project - Financial Model 31.01.2012.xls]1 Assumptions Assumption: Investment rate Normal distribution with parameters: Mean Std Dev Cell: B38 6,920 692 Worksheet: [Final Project - Financial Model 31.01.2012.xls]2 IS-CFS Assumption: Borrowing period Uniform distribution with parameters: Minimum Maximum Cell: D168 5.00 9.00 Assumption: Down payment Uniform distribution with parameters: Minimum Maximum Cell: D163 13.5% 16.5% 44 Chapter Risk analysis Assumption: Inflation Cell: D46 Uniform distribution with parameters: Minimum Maximum 8% 18% Assumption: Leasing period Cell: D165 Normal distribution with parameters: Mean Std Dev 7.16 0.72 Assumption: Monthly payment Cell: D164 Triangular distribution with parameters: Minimum Likeliest Maximum 405 450 495 Assumption: Real interest rate Cell: D83 Uniform distribution with parameters: Minimum Maximum 5.00% 7.00% End of Assumptions Figure 6.9 Assumption report With all uncertainties estimated, project IRR are forecasted as below The figure show us 41% of probability to get IRR ኑ 25% and NPV ኑ 0; 84.7% of probability to get IRR ኑ 15% 45 Chapter Risk analysis Figure 6.10 Forecast report 46 Chapter Risk analysis 6.6 VALUE AT RISK Figure 6.11 Value at Risk Value at Risk is used to measure of the risk loss in this project Figure 6.11 express at the confidence level 95%, the project has 5% of probability to lose 32 billion VND present value of all future cash flow in the leasing period 47 Chapter Conclusion and Recommendation CHAPTER CONCLUSION AND RECOMMENDATION SUMMARY At the time this research conducted, office for rent market trend is not so optimistic because of global recession Increasing office space vacancy could help lessee other options on workplace for their strategy However the project recommends long term and stable accommodation which bring advantage on years later Building construction and management is not a modern or strange technology With many experience from other projects, F Land the lessor has enough ability to conduct the project with controllable budget The project is financed by main sources: equity from the lessor’s shareholder, loan from borrowing and down payment from the lessee The difficult in the moment is probability to borrow money from the bank for real estate project because of credit crunch This can be solved by borrowing from other sources of fund, FPT Corporation for instance, or increasing down payment Model forecast distribution showed us the probability to succeed the project With well control, the project could bring profit for both parties For detail summary of the project, Executive Summary Report is issued to help the manager or decision-maker quickly understand and decide whether it is worth to go further CONCLUSION AND RECOMMENDATION The objective of this research is to evaluate an opportunity in business activity That is a specific cooperation between specific enterprises But that is normal and usual in business life and could happen anytime to any enterprise By building a dynamic excel model and visual charts, the research not only determines the lease factors, result of opportunity assessment, but also help decision-maker better understand profitability and uncertainty: where profit comes from, how it fluctuates, what impact it, how certain they are It could be modified to fit the situation However, the model is based on assumptions and estimates The more accurate estimates are, the more reliable result is The cooperation between companies in the context is at the early stage and need more discussion By more discussion and negotiation, the more accurate data shall be provided At that time further update for this research is recommended 48 Reference REFERENCE Benninga S (2008), “Financial Modeling”, 3rd edition, Massachusetts: MIT Press Charnes, J (2007), “Financial Modeling with Crystal Ball and Excel”, New York: Wiley Ehrhardt M., Brigham E (2011), “Corporate Finance – A focused approach”, 4th edition, South Western: Cengage Learning Fernaldez, P (2002), “Valuation Methods and Shareholder Value Creation”, USA: Academic Press Higgins, R (2009), “Analysis for Financial management”, International edition, Singapore: McGraw Hill Ross, Westerfield, Jaffe (2003), “Corporate Finance”, 6th edition , McGrawHill/Irwin European Commission (2004), “Project Management Cycle Guidelines” Loren E Abraham et al (1996), "Sustainable Building Technical Manual: Green Building Practices for Design, Construction, and Operations", USA: Public Technology, Inc 49 Appendix 50 Appendix APPENDIX 2: DETAIL BOQ OF SIMILAR PROJECT A Code 1a 1b C Total Investment Amount Construction cost 123,588,759,200 Construction cost - Main building 122,365,687,723 Construction cost - Temporary building 1,223,071,477 Equipment cost 30,078,918,675 Project management cost 2,233,161,039 Investment & construction consultant cost 6,241,921,694 Other 852,863,759 162,995,624,367 D A Code 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1a B C Construction cost - Main building Pile 21,436,577,802 Construction method 2,201,659,866 Main structure 72,799,081,630 Lighting 11,062,423,913 Light electric 1,652,277,565 Active lightning system 273,336,116 Drainage and water supply 3,673,773,788 Air conditioner 6,329,773,864 Fire fighting and protection 2,878,243,179 Worm, bug protection 58,540,000 Construction cost - Main building 122,365,687,723 D 12 13 14 15 16 17 18 19 20 21 22 23 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 A Code 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 2.15 2 10 B B C 75% 1% 18% 1% 4% 1% 100% 18% 2% 59% 9% 1% 0% 3% 5% 2% 0% 100% D Equipment cost Elevator Generator Drainage equipment Air conditioner Ventilation equipment of air conditioner Fan for ventilation Chiller Fire fighting & prevention Active lightning on AC and DATA line Sound system Internet & telecommunication infrastructure Hub & Cisco network Camera cable Camera IP Dome Cable tray Equipment cost 51 4,462,150,000 3,300,000,000 505,647,000 8,164,201,500 254,260,500 326,089,000 2,786,537,700 1,369,818,182 339,687,300 236,444,208 1,987,243,658 3,682,158,480 236,448,052 2,148,619,200 279,613,895 30,078,918,675 15% 11% 2% 27% 1% 1% 9% 5% 1% 1% 7% 12% 1% 7% 1% 100% Appendix 43 44 45 46 47 48 49 50 51 52 53 54 A Code 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 56 57 58 59 60 61 62 63 64 65 A Code 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 67 68 69 70 71 72 73 74 A Code 1.3.1 1.3.2 1.3.3 1.3.4 1.3.5 1.3.6 1.3 B C Investment & construction consultant cost Soil investigation 196,000,000 Investment project appraisal 304,545,455 Shop drawing - Estimate - BOQ 2,750,168,832 Verify Shop drawing 122,855,150 Verify Estimate - BOQ 120,163,105 Bidding - Construction package 110,251,485 Bidding - Equipment package 68,279,145 Site Inspector - Construction 1,783,112,802 Site Inspector - Equipment installation 162,456,240 Quality conformity certificate 624,089,481 Investment & construction consultant cost 6,241,921,695 B C D 3% 5% 44% 2% 2% 2% 1% 29% 3% 10% 100% D Other cost Insurance Audit Project completion fee Investment approval fee Shop drawing approval fee Estimate - BOQ approval fee Bidding approval fee Commencement ceremony Other cost 335,558,134 287,535,556 101,821,005 15,854,239 12,603,666 15,601,625 16,777,907 67,111,627 852,863,759 B C 39% 34% 12% 2% 1% 2% 2% 8% 100% D Main structure Material cost Labor cost Equipment cost Other cost Management cost Income tax Main structure 52,730,008,808 8,233,698,280 2,248,356,436 1,580,301,588 4,211,503,732 3,795,212,786 72,799,081,630 52 72% 11% 3% 2% 6% 5% 100% ... Year: 2011 - 2012 Topic: FINANCIAL ANALYSIS AND RISK ASSESSMENT OF OFFICE BUILDING PROJECT BETWEEN SUBSIDIARIES OF FPT CORPORATION Student: HUYNH PHUC DUY In term of the contents, the thesis has... understand uncertainty of result, to see how input and output are related Financial analysis of the project is conducted by building excel financial model based on assumptions from experience of. .. 1.1 BACKGROUND A FPT Corporation B FPT Land Company Limited (F.Land) C FPT Software Joint Stock Company (F.Soft) D Raising of cooperation 1.2