High-street retailers Pets at Home (PETS) and Poundland (PLND) floated on the gray market on Wednesday, with their shares listed at 245p and 300p respectively.

In morning trading, Poundland surged ahead with its share price increasing by over 29% to 387.5p, whereas Pets at Home faltered and was trading at nearly a 1% discount at 243.50p.

Despite Poundland’s promising start, which pushed its market cap to over £900 million, Henderson Smaller Companies Investment Trust manager Neil Hermon warned investors that it could be overpriced for its growth potential.

He said: “Our focus on growth at a reasonable price can be exemplified in our clear preference to purchase SafeStyle, a UK manufacturer of windows and doors which came to market on at nine times earnings and a 7% dividend yield over Poundland a single price point retailer which is likely to come to the market at 20 times two years forward earnings and a dividend yield under 2%.

“Being disciplined with valuation serves a dual-purpose – it should provide investors with better long-term returns and also keep the long line of vendors in check.”

With a market cap of around £1.2 billion, Pets at Home listed its 245p shares at the upper end of its initial 210p-260p price range. The specialist pet retailer forecasts a minimum underlying earnings before interest, tax, depreciation and amortisation of £110.2 million for the full financial year ending 27 March 2014. Based on its initial price range, Pets at Home will be trading on a forecast price/earnings ratio of between 17 and 20 times, the Investor Chronicle reported.

Poundland stated that its initial public offering (IPO) would only be available to institutional investors when it announced its intention to float last month. Both companies will formally begin trading on the London Stock Exchange on Monday.

Analyst view

Hermon reminded investors to be sensible in an environment where the demand for stock exchange flotations has returned with a “vengence”.

“After a considerable period in the doldrums, the IPO market saw a return to form in the last quarter of 2013 where just under £6 billion worth of issuance made it the third-largest IPO quarter for a decade. So far it is the retailers leading the pack, with AO World, boohoo.com, Koovs, Poundland, McColls and Pets at Home all having announced their intention to float.

“Behind these, strong rumours abound that we can expect others like House of Fraser, Card Factory and Shoezone to follow suit. With at times eye-watering valuations and premiums requested on what is already one of the most expensive sectors in the market, it is important to ignore the rhetoric and stick to the fundamentals.

Investor view

Users on the Pets at Home Interactive Investor discussion board believe the high-street store is a good growth investment.

‘Waytogo333‘ said: “Good solid business with a growth history – particularly like the vets element as an area of growth. Let’s face it, the Brits love their pets and I’ve never been in an empty Pets at Home!”

‘Hobione‘ agreed: “This is one to tuck away for the ISA me thinks. Small shareholding so no real worries. Expect growth and income in the future.”

However, some users were concerned with potential competition from high-street supermarkets.