Description

Cadus Corporation (KDUS) was written up in VIC five years ago , but the circumstances have changed dramatically from then. It is no longer a pile of cash with no investment strategy. The Company has invested substantially all of its cash in south Florida real estate over the past few years. The stock is dirt cheap as it has gotten no credit for it's investments and sells at sharp discount to the value of its real estate investments.

Perhaps, you may say it's not a great idea to buy  in front of Irma, but I disagree. The real estate is insured and the appearance of Irma may provide more liquidity in the stock for opportunistic investors who can purchase shares from panicked current holders. In addition, only two of its twelve lots in Florida have been constructed.

The Company is 68% owned by Carl Icahn, which is certainly not bad company, but it does limit the liquidity of the shares. He is certainly not an individual who wants to throw his money into dumb investments.

The Company was incorporated in 1992 to develop yeast-based drug discovery technologies. This was a complete flop. In 2013 it dropped all efforts in this area and began to look for another use for its remaining cash (and additional cash of $20 million was secured from a rights offering in April 2014) . The Company decided to predominately concentrate on real estate acquisition, renovation and construction activities in south Florida. In February of 2014 it bought its first property in Florida. As of June 30, 2017 the company owned twelve residential properties in Miami-Dade County in Florida, with the majority being water front properties. In addition, the Company owns an approximately one-acre residential zoned vacant lot in East Hampton, New York. Of these Florida properties ten are slated for construction of new one family homes. At this point, two properties have been completed and a third is under construction. Hence, the Irma exposure is much less than would appear as the Company's property is mostly vacant land.

As of June 30, 2017 the Company had an accumulated deficit of $39.7 million, that can be used to offset future profits. The balance sheet consists of $36.3 million of real estate inventory (at cost) and $4.4 million in cash. The Company has no debt, short or long term. Hypothetically and conservatively, let's assume that they have made bad purchases and the real estate is worth 10% below cost. Lets add the cash to the discounted real estate and subtract $.5 million for accrued liabilities. This leaves us with approximately $36.5 million. If we divide this by the shares outstanding of 26.3 million, we get $1.39 in value, which almost 32% below the stock price of $.95 This implies almost a potential 50% gain in the shares even if these are the most incompetent managers on the planet.

It seems to us that there is great value here. On  the other hand, what if the properties are undervalued? Then, the value of the shares could be double or more their current price. The point is we have a large margin of safety here.

In summary:

1) We are investing along side Carl Icahn.

2) We are purchasing the shares at a material discount to fair value.

3) At $.95 the shares offer a substantial margin of safety.

4) The Company is too small for anyone to be paying attention.

Concerns:

1) The shares are illiquid.

2) What will a direct Irma hit do to the Company's short term plans?

3) The Company has a history of poor performance

Catalyst

1) The Company begins to sell its real estate portfolio at a profit.

2) Icahn simply decides to buy the 32% of the shares  he does not own.