Ruralco : Annexure B to NOM - Independent Expert's Report

RURALCO HOLDINGS LIMITED

Proposed acquisition of the business of TP Jones

INDEPENDENT EXPERT'S REPORT AND FINANCIAL SERVICES GUIDE

9 JANUARY 2017

9 January 2017

The Independent Directors Ruralco Holdings Limited

Level 5, Building A, 26 Talavera Road, Macquarie Park NSW 2113

Dear Directors,

Independent Expert's Report in Relation to the Acquisition of TP Jones' Business

1. Introduction

   TP Jones & Co ("TP Jones") provides goods and services to the agricultural sector, including spray and irrigation advice and the retail of rural merchandise operating out of four locations in the North, North East and Midlands regions of Tasmania.

   On 15 November 2016, Ruralco Holdings Limited ("Ruralco"), through its wholly-owned subsidiary, Roberts Limited ("Roberts"), announced that it had entered into an agreement to acquire the business of TP Jones on a cash-free, debt-free basis for consideration of $16 million ("Consideration") less working capital and other adjustments to be determined at completion (the "Proposed Transaction").

   Further details of the Proposed Transaction are set out in Section 1 of our detailed report.

2. Purpose of report

   Acquisition of TP Jones

   The former Managing Director of TP Jones, Mr John Tuskin, is also a former non-executive director of Ruralco and holds a 15% interest in the vendors of the TP Jones business. As a result of this relationship, and since the Consideration is greater than 5% of the net assets of Ruralco, an Independent Expert's Report ("IER") is required by Ruralco to assess whether the Proposed Transaction is fair and reasonable to Ruralco's shareholders in accordance with ASX Listing Rule 10.10.2 ("Listing Rule 10").

   The independent directors of Ruralco have requested Leadenhall Corporate Advisory Pty Ltd ("Leadenhall") to prepare an IER, advising whether, in our opinion, the Proposed Transaction is fair and reasonable to Ruralco shareholders not associated with TP Jones ("Shareholders").

   Break fee

   A break fee of $0.5 million ("Break Fee") is payable to TP Jones in the event that shareholder approval is not obtained (or the other conditions precedent are not satisfied or waived) and the Proposed Transaction does not complete.

   As the payment of the Break Fee would be a payment to a related party, the Break Fee is subject to shareholder approval under Chapter 2E of the Corporations Act ("Chapter 2E") unless Ruralco forms the view that the Break Fee would be reasonable if Ruralco and TP Jones were dealing at arm's length.

   The independent directors have therefore also requested Leadenhall to provide an opinion as to whether the Break Fee is a term that would be reasonable if Ruralco and TP Jones were dealing at arm's length in accordance with Chapter 2E.

   Notice of meeting

   This report will be included in the notice of meeting ("NOM") in relation to the Proposed Transaction to assist Ruralco Shareholders to evaluate the Proposed Transaction and the reasonableness of the Break Fee.

   Further details of the purpose of this report are set out in Section 2 of our detailed report.

   ADELAIDE GPO Box 1572, Adelaide SA 5000 T 08 8385 2200 leadenhall.com.au

   SYDNEY Level 11, 65 York St, Sydney NSW 2000 T 02 8823 6224

   [e-mail]

   ABN 11 114 534 619 AFSL 293586 T 1800 355 778

3. Basis of evaluation

   Listing Rule 10

   In order to assess whether the Proposed Transaction is fair and reasonable to Shareholders in accordance with Listing Rule 10 we have:

   • Assessed it as fair if the value of the TP Jones business is equal to or greater than the value of the Consideration

   • Assessed it as reasonable if it is fair, or if despite not being fair, the advantages to Shareholders outweigh the disadvantages

     Break Fee

     In order to evaluate the terms of the Break Fee, we have considered the following factors:

   • How the terms of the overall transaction compare with those of any comparable transactions between parties dealing on an arm's length basis in similar circumstances

   • The nature and content of the negotiating process

   • The impact of the transaction on the company

     Further details of the basis of evaluation are set out in Section 2 of our detailed report.

4. Analysis of fairness

   We have assessed the fair market value of the business of TP Jones using the capitalisation of future maintainable earnings ("CFME") methodology. In applying the CFME methodology we have:

   • Determined a maintainable level of EBITDA of $2.7 million to $3.0 million. This equates to a maintainable level of EBIT of $2.5 million to $2.8 million after adjusting for depreciation and amortisation. This level of earnings was assessed after consideration of historical earnings (normalised to remove non-recurring items and to include the full-year impact of recent acquisitions), year to date earnings, TP Jones management forecasts for FY17 as well as broker forecasts for broadly comparable companies

   • Applied an EBITDA multiple of 5.0x to 5.5x and an EBIT multiple of 5.5x to 6.0x. These are control multiples, derived from analysis of takeover transactions and share market trading prices of companies with similar businesses to TP Jones

     The result from this methodology was cross-checked using a discounted cash flow ("DCF") analysis over a period of five years (with a terminal value) with the following key assumptions:

   • Revenue growth based on a combination of historical growth rates, growth from the acquisition of two new stores and growth initiatives being implemented

   • Gross profit margins assumed to increase to a higher maintainable level having regard to management forecasts and the position of the business within the Tasmanian market

   • Terminal growth rate of 2.5%

   • Discount rate of 14.0% to 15.0%

     The result from this analysis provided additional support for the assessed valuation range pursuant to the CFME approach presented above.

     Further details of the valuation of the TP Jones business are set out in Section 6 of our detailed report.

     We have assessed whether the Proposed Transaction is fair by comparing our assessed fair market value of TP Jones' business on a control basis with the Consideration. This comparison is set out in the table below.

     Table 1: Assessment of fairness $'m Low High

     Fair market value of TP Jones' business 13.5 16.5

     Consideration 15.8 15.8

     Source: Leadenhall analysis

     We have estimated the value of the consideration to be $15.8 million after deducting the after-tax cost of leave balances of $0.2 million and assuming no working capital adjustments upon completion.

     Since the Consideration is within the assessed range of values of the TP Jones business, the Proposed Transaction is fair to Shareholders.

5. Analysis of reasonableness

We have defined the Proposed Transaction as reasonable if it is fair, or if despite not being fair, there are sufficient reasons for Shareholders to vote for the proposal. Since the transaction is fair, it is therefore reasonable. However, we have also considered the following advantages and disadvantages of the Proposed Transaction to Shareholders.

Advantages

We consider the principal advantages of the Proposed Transaction to Ruralco shareholders are:

• In line with Ruralco strategy: Ruralco has a stated strategy of targeted expansion of its retail footprint. Tasmania represents a desirable market for this expansion with significant growth expected in the agricultural sector over the long-term. TP Jones services producers of high value commodities throughout a key region with secure access to water which is consistent with Ruralco's strategy
• Potential synergies which have not been fully factored into purchase price: Ruralco management have estimated a range of potential synergies which include cost savings from procurement and other efficiencies of approximately $0.5 million. Additionally, Ruralco has identified potential synergies such as site consolidation as well as leveraging Ruralco's agency businesses (i.e. real estate, wool & livestock) across TP Jones. These aspects have not been quantified but are expected to have a meaningful contribution to future profitability of the combined business with limited risks to achieving these benefits
• Access to key management: TP Jones has a highly experienced management team and Ruralco believes the merger will achieve the required cultural and operational changes to improve the performance of the Roberts business
• Expected to be accretive to earnings per share ("EPS"): Ruralco have estimated that the Proposed Transaction will be EPS accretive

  Disadvantages

  The main disadvantages of the Proposed Transaction are:

• Increased gearing: If the Proposed Transaction proceeds, the gearing for Ruralco will increase moderately as the consideration is anticipated to be debt funded
• Purchase price includes an element of synergies which may not be achieved: Based on our analysis, the purchase price includes an element of the synergies expected to be realised by

Ruralco. Whilst the synergies quantified by Ruralco pertain to relatively low risk cost savings, there is a risk that the synergies will not be realised to the extent expected